Individual Voluntary Arrangements

Wednesday 10 January 2024

(Updated 27/02/25)

When a member of your credit union finds themselves in financial difficulty, you may find that they sign an Individual Voluntary Arrangement. Below we have set out what you should expect if you are asked to vote on an IVA, and what happens when a member is within one. We have also set out some things credit unions might want to consider when dealing with an IVA.  

An Individual Voluntary Arrangement (IVA) is a voluntary agreement that a individual makes with creditors when they feel they can no longer afford their debt repayments. Control of their assets and income is transferred to a Supervisor (an Insolvency Practitioner) for a set period of time, who will use it to repay a portion of their debts. At the end of this period, as long as the debtor (your member) has complied with the conditions of the IVA, they will have their remaining debts written off.

As a creditor in an IVA, though it is a voluntary agreement in law, you may find that you have no choice but to comply with the terms of the IVA (if the majority of other creditors vote in favour of it). Once a member is in an IVA, you cannot take any steps to recovery the money owed through alternative means, nor can you do so once completed. Returns from IVAs tend to be low – typically less than 20% – and you may find that it is not the best solution for many of your members. We would encourage credit unions to engage with the process, ensure the work of the supervisor is scrutinised, and get to know the rules of the system.

The Guidance

The legislation governing the rules of IVAs is the Insolvency Act 1986. However, the IVA Protocol sets out much of the detail in terms of how IVAs should be handled – it sets out the expectations of debtors, supervisors and creditors.

The IVA Protocol has been updated in 2021 and sets the current standards for IVAs. We would recommend that credit unions are familiar with the guidelines in both the IVA Protocol 2021 and IVA Protocol 2021 Annex 1.

The Protocol is not a legal document – and indeed its acknowledged within it that it cannot apply to all cases. ABCUL are not signatories of the protocol and so it is in no way binding on members. However, it does set the expected standard for IVAs and we fully believe you have the right to question any significant divergence from it in cases you see.

The Statements of Insolvency Practice also set out expected standard of how Insolvency Practitioners should handle IVAs – the most relevant to IVAs are SIP 3.1 and SIP 9

Frequently Asked Questions

ABCUL have brought together and answered the most frequently asked questions we receive from credit unions on IVAs. The FAQ document is accessible via the link below.

Credit Union IVA FAQs 2021

The Process

The first time you are likely to learn that one of your members is exploring an IVA is when the firm or individual representing them contacts you to ask you to either approve, reject, or modify an IVA proposal and provide proof of and the extent of the outstanding debt.

It is likely you will be invited to vote on the proposal, either in a conference call, or in writing. In submitting this, and if the loan agreement allows, you should offset the outstanding balance with any shares the member has. If not, you may be required to give control of the shares to the supervisor, who will then distribute them between all creditors.

The rules allow you to put forward modifications at this stage as a condition of your support. However, it is up to the debtor and supervisor as to whether you accept these. It is up to you as a credit union to make a judgement on whether you wish to support it based on how reasonable it is. ABCUL would always advise credit unions to consider what might happen if the proposal is rejected. It is often to put to credit unions that an IVA represents a better outcome than bankruptcy. However, it is worth considering whether the member would realistically progress with bankruptcy, given the consequences on their finances and home. Similarly, if a member has not been paying for some time, an IVA ties them into an obligation to pay at least something, it may result in an increase in payments. Of course, you should also consider what is in the interests of the member, and if you feel that their circumstances justify them getting debt write off.

Some points that credit unions may wish to be aware of at this stage:

  • There is no minimum debt level for entering an IVA. The fees the debtor needs to pay as part of the process are notoriously high – averaging over £5000 irrespective of the total debt. As a creditor, it is right that you should question whether lower debt IVAs are appropriate in light of this. For example, Citizens Advice advise members that, unless their debt in more than £10,000, an IVA may not be the best outcome for them.
  • At the other end of the scale, it is worth giving particular scrutiny to those with higher debt levels – this will usually happen because an IVA is seen as a way to protect their family home (as they would otherwise be facing bankruptcy). As ethical creditors, it is clearly appropriate for you to take into account whether you really feel it would be appropriate to prevent this solution in light of this. However, you can also take into account how much equity is in the property and fully understand the supervisor’s plan for how this is handled. Though the Protocol states that no one should have to sell a home because of an IVA, it does set out steps the supervisor should take to explore remortgaging or, where not an option, extending the IVA. It’s reasonable, as a creditor, for you to give consideration to how much debt would be written off through the IVA relative to how much equity is in the home.
  • It is also worth considering that, even if the member has not defaulted on any payments to the credit union, they may be having problems that are not visible to you. IVAs need to take into account the individual’s overall financial situation.
  • The IVA protocol states that you should be cautious about the suitability of those whose only income is from benefits. Similarly, if you do not feel the proposal is affordable or sustainable for your member, you can reject it. If the member has clearly not been living within their means for some time, the prospect of them committing to repaying hundreds of pounds a month for several years may not appear to be realistic.
  • You are fully within your rights to ask questions in areas you are concerned about or unclear about. Many firms employ scripted call handlers to deal with enquiries, and this has often resulted in the inaccurate or misleading answers. You should make direct contact with the Insolvency Practitioner named on the paperwork to raise your concerns.
  • The repayments in IVAs are usually calculated according to a financial tool – often the Standard Financial Statement. However, there is still an expectation that the supervisor should collect evidence of income and expenditure. You can certainly question any discrepancy between the figures provided and the information previously given to you by the member.
  • We would encourage credit unions to pay close attention to the fees being charged by the Insolvency firm at this stage. In our experience, they often agree to reduce them in exchange for support for the IVA.  The Insolvency Services requires all fees to be fair and reasonable.
  • The protocol requires disclosure at previous debt management attempts, including IVAs, and whether they have been rejected by creditors. This may be relevant if you have previously been asked to vote on IVAs for this individual.

At this stage you should also have sight of how large your outstanding debt is relative to the total amount owed by the individual. It may be the case that you are a smaller creditor and so will not have a deciding vote. If this is the case, it is important to ensure that the fees being charged are legitimate and that there are no other discrepancies – it is reasonable for you to expect that as much of the debtor’s payments as possible are returned to you as a creditor. We would also encourage you to vote, irrespective of how large the debt is, and to engage with other credit unions listed – it may be the case that smaller groups of creditors can influence the final outcome.

If the IVA is unsuccessful, you should receive notification from the Insolvency Practitioner. If this is the case, there is no change to your rights as a creditor to either continue to receive payments (if ongoing) or take to action to recover outstanding debts (if not). If you become aware that the member remains in financial difficulty, it may be worth directing them towards free sources of advice, as outlined below.

If the IVA is successful, you will receive notification of this from the Insolvency Practitioner. The IVA will appear on the Insolvency Register. From the date it is approved, you are bound by the terms of the IVA, regardless of whether you voted for it. You should therefore:

  • Update your records to reflect this. You should ensure that no automated payment demands are sent to the member (statements and generic mailings can continue).
  • Take steps to ensure that any payroll deduction arrangements or standing orders are stopped as soon as possible. It will likely be the case that the member will need to do that, but you should be proactive in asking them to.
  • You must also stop any recovery by third parties, such as debt collection firms, on your behalf.

You may occasionally find that an IVA has gone ahead without your knowledge. If you become aware that this has happened:

  • Firstly, IVAs that you did not have an opportunity to vote in are still binding on you as a creditor. The member does not have the right to decide to exclude some based on personal preference.
  • If the member or supervisor contacts you to advise you that an IVA is in place, we recommend that the credit union act as soon as possible, in line with both the Insolvency Act and the IVA Protocol. However, we would encourage members to question the supervisor on how this happened.
  • If you were excluded from the voting and were the largest creditor, you should ask that the IVA be stopped and another vote take place. You should note that you intend to complain to their RPB if this request is refused.
  • If the debt that you are owed means the total debt is now more than 25% more than the figure they had initially assumed, the protocol states that the supervisor needs to seek a view from creditors on how best to progress. This means that debts of a significant size cannot simply be added to an existing IVA without another vote.
  • You may agree that your vote would have had no impact on the outcome of the IVA, and that it is therefore binding, but be unsure as to how to handle payments made by the member in between them entering an IVA, and you becoming aware of this. The Protocol is not definitive on this issue, so we would encourage credit unions to make a judgement on whether the IP had taken reasonable steps, and whether it represents a substantial loss to the credit union.

During the IVA

You may find that payments you receive from the IVA alter from the figure you had understood. Supervisors can vary the amount by up to 15% to reflect changing circumstances and without creditor consent. There is also discretion for the supervisor to allow payment holidays totalling no more than 9 months in total, and subject to certain conditions.

Where there has been a breach of the agreement that cannot be resolved, the supervisor should notify you within 28 days that it has been terminated or to seek a view from creditors on how to proceed.

The protocol encourages lenders to take reasonable steps to ensure that no further credit is issued, unless the circumstances are justifiable. It also sets a limit of £500 on additional credit without the agreement of the supervisor.

Once a completion certificate has been issued, any outstanding debts cannot be pursued and should be written off. You should note that an IVA can be ‘completed’ even if not all payments have been made, as long as the supervisor is satisfied that any breaches have been explained and accounted for.

Credit referencing

Once you have been notified of a start date for an IVA you will need to mark the account in default with your CRA (Credit Reference Agency). If by the completion of the IVA you have not received the full original balance outstanding on the account, you should close the account and mark it partially settled with your CRA. More information can be found in the Steering Committee on Reciprocity’s Principles for the Reporting of Arrears, Arrangements and Defaults at Credit Reference Agencies.

Provisioning and write-offs

The Prudential Regulation Authority (PRA) requires that credit unions adequately provide for bad debts. This should be based on experience, and many credit unions operate a policy of provisioning 100% for all debts that have entered into an IVA.

Under FRS102, debts should be written off once the credit union no longer has any rights to future payments. Therefore, credit unions should write off any debts included in an IVA upon completion.

 
Complaints

If you wish to make a complaint about how an Insolvency Practitioner or firm has handled an IVA, you should firstly complaint to the firm. It’s worth noting that the regulatory system as it currently is does not recognize insolvency firms, only individual Practitioners. You should firstly find out who the IP responsible for the IVA is, which should be on your paperwork, and be clear that you are complaining about them.

If you want to pursue the complaint further, you should contact the IPs Recognised Professional Body. The best way to do this is via the UK Government’s Complaints Gateway, which ensures all complaints reach the correct body.

ABCUL would advise:

  • Base your complaint, as much as you can, on the regulatory documents set out above – the RPBs are unlikely to make any judgements on matters without these. It is unlikely, for example, that the fact that a credit union was the complainant would have any impact on the outcome.
  • Be persistent—in ABCUL’s experience, the RPBs can take a long time to consider complaints, often giving the IPs unlimited windows to provide requested information. Be clear that you are awaiting a response and follow up on this at regulator intervals.
  • Be clear about who the IP is and what your expectations are of how they should handle the matter, even if you haven’t had any direct contact with them. The RPBS have no jurisdiction over, for example, CreditFix – you can only complain about the IP named as being responsible for the case.

Helping members in financial difficulty

If a member of your credit union approaches you to discuss financial difficulties, we encourage any credit union to work with them to find a solution – informal agreements are likely to benefit both the credit union and the individual. However, you should cooperate as much as possible with any solution the members opt to explore.

Below we some sources of free confidential advice, should you need to refer anyone (though you will of course, be more familiar with local sources of information, depending on where you operate):

ABCUL

Reform of the insolvency market remains one of ABCUL’s policy priorities, and we are regularly in touch with regulators and policy makers about trends. We’re happy to hear from any member that has concerns about a particular case or trends.