Full and Final Settlement IVAs are a very useful means of creating a legally binding agreement with your creditors to pay off a portion of your debt via a one-off lump sum payment. As with any IVA, when you have fulfilled your legal obligations the balance of your debts are written off. There are a number of different aspects to consider with regards to a Full and Final Settlement IVA in order to ensure that you get the desired outcome.
What is a Full and Final Settlement IVA?
The best way to describe a Full and Final Settlement IVA is a legally binding agreement which brings your debts under an IVA umbrella. This specific structure allows you to pay off a percentage of your overall debt via a one-off lump sum payment after agreement with your creditors. Once the lump sum payment has been made then the balance of your debts are written off and your creditors are unable to chase you for any additional payments.
What are the benefits of a Full and Final Settlement IVA?
There are a number of factors to take into consideration with regards to Full and Final Settlement IVAs, which can be beneficial to all parties. These include:-
- Early settlement to creditors (potential discount on outstanding balance)
- Reduced administration fees
- Alternatively to relatively expensive bankruptcy proceedings
- Opportunity to convert a vanilla IVA into a Full and Final Settlement IVA
- Reduction in mental pressure and chance to move on
In reality, IVAs can often be costly to administer and sometimes the net income for creditors can be relatively low. So, in order to save on administration costs and allow individuals to move on, and lenders to write off bad debts, a Full and Final Settlement IVA can be beneficial for all parties.
Example of a Full and Final Settlement IVA
Jonathan has amassed debts totalling £61,000 and was recently made redundant from a relatively well-paid job. He received a redundancy payment of £10,000 and may also have PPI compensation due to him as a consequence of previous mis-selling. In a bid to draw a line under his difficult financial situation he decided to pursue a Full and Final Settlement IVA using his redundancy money.
After taking financial advice, and comparing the costs and benefits for his creditors over bankruptcy proceedings, the following IVA proposal was put forward to creditors. Jonathan also agreed that any compensation regarding the mis-selling of PPI would be paid to the insolvency practitioner and distributed amongst his creditors.
|Administration costs||£10,000 plus||£2,300|
|Payments to creditors||Nil||£7,700|
|Dividend to creditors||Nil||12.62p|
As you can see, if creditors had decided to take the bankruptcy route (as no regular payments could be made) then the redundancy funds would have been swallowed up by administration costs. These costs are significantly less with a Full and Final Settlement IVA which is often set up within six to eight weeks and does not run for the traditional five-year term.
When might a Full and Final Settlement IVA be possible?
There are a number of scenarios where it may be possible to negotiate a Full and Final Settlement IVA. They tend to revolve around scenarios where individuals are only able to pay a relatively low monthly repayment, or their financial circumstances deteriorate, but who may have access to a lump sum. This lump sum may be a consequence of a:-
- Retirement plan withdrawal
- Redundancy payment
- A gift from a family member/friend
- Asset sale
- Equity release/remortgage of a property
There may also be other scenarios where an inheritance or windfall is received out of the blue. In these situations, the inheritance/windfall would tend to fall under the control of your insolvency practitioner automatically. If the funds involved were sufficient to pay back the IVA debt in full, or a significant percentage, then it may be possible to convert a traditional IVA to a Full and Final Settlement IVA.
Proposing a Full and Final Settlement IVA
As with a traditional IVA, whether setting up a Full and Final Settlement IVA from day one or converting a traditional IVA, the proposition would still require the support of 75% of your creditors (by value of debt). It is not a foregone conclusion that your creditors would accept a Full and Final Settlement IVA and very often negotiations will be required to secure a successful outcome. Indeed, you may find that your insolvency practitioner, managing your IVA application, may refuse to propose your Full and Final Settlement IVA because they deem it not sufficient to attract the support of creditors.
In the event that your Full and Final Settlement IVA proposal was rejected by your creditors (or not even presented by your insolvency practitioner) then you may need to seek an alternative solution.
How much should you offer?
There is no hard and fast rule with regards to how much you should offer your creditors if you’re able to secure a lump sum payment in settlement of all outstanding debts. The key is to make it attractive to your creditors and, as you can see above, a viable alternative to bankruptcy. The reality is that if they do not accept your lump sum payment, and you are unable to provide regular payments, then the only viable alternative may be bankruptcy.
When it comes to creditors considering your revised lump sum debt repayment proposal they will take the option which gives them the greatest return. If for example you were able to offer a lump sum payment towards the end of a traditional IVA five-year term then they may expect payment of outstanding IVA debt in full. However, if you are able to offer a lump sum payment in year two then they may well consider a discount on the outstanding debt in exchange for early repayment.
Whether proposing a Full and Final Settlement IVA from the outset or looking to terminate a traditional IVA early with a lump sum repayment, there are benefits for individuals and creditors. Creditors receive a significant proportion of their funds early and individuals are able to draw a line under their financial troubles. When it comes to inheritance/windfall payments these may automatically become part of your IVA. They could be used in part or full to repay outstanding IVA debts with any surplus returned to you.
Your credit file will still make reference to an IVA for six years after inception. This is the case even if you are able to arrange a lump sum payment and terminate the IVA early. So, while your creditors may have agreed to write off your debts and call a halt to your repayments, it may still be some time until the reference is taken off your credit file.