A few words have been changed in the 2014 IVA Protocol. This post looks at the addition of secured loans in the equity release section – what are its implications and do you need to be concerned about it? For a more general overview of IVAs and their advantages and disadvantages, see this page.
Update – July 2016 – there are a lot of changes in the new version which has just been published – see 2016 IVA Protocol for details.
What is the IVA Protocol?
The Protocol was introduced in 2008 as a template for straight-forward consumer IVAs. Whilst an IVA can be very “individual” if necessary, using a common framework for the majority of cases makes it easier for the debtor to understand what is being proposed and quicker for creditors to approve a proposed IVA.
Some more complicated IVAs don’t use the Protocol at all or have some variations on it – this sometimes happens if you are self employed. If you are talking to an IVA firm about setting up an IVA, you should ask if the Protocol will be used – if the answer is “No” or “with variations” you need to ask why and what the implications are for you.
It is reviewed annually but changes are not always made. The most recent version is the 2014 Protocol which came into force in January 2014 – no changes were made in 2015.
The addition of “secured loans”
Section 9 of the Protocol describes the procedure for seeking a release of equity in the last 6 months of an IVA. If the debtor cannot get a remortgage offer, the supervisor will usually consider accepting a 6th year of IVA payments instead.
The change in the 2014 Protocol was that the phrase “Remortgage includes other secured lending such as a secured loan.” has been included in 9.2.
The significance of this is that it is considerably easier to obtain a secured loan than it is a remortgage, and the terms of a secured loan are usually a lot less favourable – especially if you have a poor credit rating, which will be most people with IVAs. In some circumstances it is possible for a secured loan to be cheaper than a remortgage, especially if the existing mortgage is large and at a very favourable rate, but this won’t often be the case.
Who is affected by the change?
This won’t make any difference to debtors who don’t own a house (but if you have no assets to protect it is questionable whether an IVA is really a good option for you, see the Guide to IVAs for further discussion about whether an IVA is your best choice.)
It shouldn’t make a difference to IVAs already in progress, as they will have been agreed under the previous protocol and the previous wording “remortgage” did not include “secured loans“. Otherwise there would have been no need to add in the new clause.
***UPDATE see new article: some people with an IVA are being asked to incorporate the 2014 Protocol.** Note the comments on that article where some clients are being asked to take on secured loans at 16% and 22% ***
The main people affected are people with houses who are now considering IVAs. After the 2008 Crash, the mortgage market has been so difficult that many people will have entered into an IVA expecting that they will be unable to remortgage and accepting that instead they will have their IVA extended to 6 years.
With the 2014 Protocol, it will no longer be possible to make this assumption. Instead of a definite end within 6 year, there will be the uncertainty that they may have to take out a potentially expensive secured loan for a further 10 years or even 15 years.
Could people just choose to have an IVA under the 2013 Protocol?
It isn’t clear if this could be a realistic option. For obvious reasons lenders will prefer the 2014 Protocol and they may refuse to vote in favour if this isn’t used. But it would certainly be worth discussing this with your Insolvency Practitioner if you are concerned.
When you are signing up to an IVA it is important that you understand what could happen in different situations. The possibility of requiring a potentially expensive and lengthy secured loan in the last few months of an IVA appears to me to be a considerable and unwelcome complication.
People would be wise to look harder at their alternatives to an IVA, such as bankruptcy or selling their house. It may even be sensible for some people to contemplate taking an expensive secured loan instead of an IVA, rather than make 5 years of IVA payments and then get saddled with the loan anyway.