For homeowners, an IVA may well be a much better option than bankruptcy. In bankruptcy the house is at risk – the debtor may have to come up with a lump sum representing the equity value of the property, to avoid the Official Receiver selling the property to release funds towards the bankruptcy. In an IVA the property is legally protected as long as the IVA is completed successfully.
No creditor can file for bankruptcy or place a charging order on the property once the debtor has the legal protection of an IVA. Towards the end of the IVA, when equity release becomes an issue, no creditor can ask the debtor to sell the property in order to release the equity. It is safe. But a property with equity is an asset and as such has to be declared in an IVA application. Creditors could decide to reject the IVA proposal if they feel that there is sufficient equity to enable the debtor to repay all their unsecured debts, even if it meant them voluntarily selling and downsizing.
But assuming that the IVA is accepted, the Insolvency Practitioner has a responsibility to find out if any equity is releasable by the debtor re-mortgaging (or perhaps obtaining a secured loan). Often this is impossible – there is not enough equity and the debtor has a poor credit rating – two reasons amongst others why such a request may prove fruitless. In such circumstances the debtor has done the best they can and no equity is released. In these circumstances, a 6th year on the IVA may be required.
Even if equity is releasable by re-mortgaging there are some rules that the Insolvency Practitioner will apply. If the extra cost of the mortgage is likely to lead to financial hardship then they will not be allowed to continue with the release. The point of an IVA is to get the debtor out of debt and not plunge them further into it. If the extra cost of the mortgage or secured loan is more than half the cost of the monthly IVA payment level, then it may be considered too much.
In the case of a single IVA but joint ownership of a property, it is only the debtor’s share of the equity that is relevant.