An IVA (Individual Voluntary Arrangement) is an increasingly popular alternative to bankruptcy, designed to avoid many of the disadvantages and the stigma that bankruptcy involves to get out of debt.
An IVA is a binding legal agreement between you and your creditors in which you undertake to pay an affordable monthly sum for a sensible period, not usually more than five years, at the end of which any remaining debts are written off. If you do not keep up repayments for the entire period of the IVA you are likely to be
made Bankrupt.
Because there is no need for an IVA to be advertised, many people are not aware of their existence. But as levels of debt in the UK rise, so does the awareness of IVA’s – more than 6,000 people a year enter into IVA’s to resolve their debt crisis.
The amount you pay through an IVA is based on your disposable income after reasonable living expenses are deducted.
Can I benefit from an IVA?
If you reach a point where you can’t meet the repayments due on your borrowing, you are insolvent in law, with two possible courses of action – bankruptcy or an IVA.
For an IVA to be the solution to your need to get out of debt, your debt needs to be a minimum of £5,000 owed to at least 3 different creditors.
And, for an IVA to be put in place, 75% of your creditors need to agree. As long as at least three-quarters are agreeable, any remaining creditors will also be legally bound by the agreement.
If your unsecured borrowing is less than £5,000 you will not be able to enter into an IVA.
How does an IVA work?
If your debts are for £15,000 0r more, then an IVA is the route for you (Debts totalling £15,000 or less are dealt with by a debt management plan or if you have a low income or are unemployed then a debt relief order will solve your problems), and wish to propose an IVA to your creditors you will need the help of an Insolvency Practitioner (sometimes referred to as an IP) who is licensed to carry out negotiations with your creditors regarding the repayment of your debts.
Once you have appointed an IP, they will work with you and following a review of your financial situation they will work out how much you can offer your creditors, which can be as little as 25% of your total debt as full repayment of your debt.
He/she will then draw up a formal written proposal for your creditors, detailing your debts and how much you can afford to pay and over what time period.
This will be circulated to your creditors, who may or may not request modifications, though none can be made without your agreement.
A creditors meeting will be held to discuss your proposal. As long as 75% of your creditors accept the proposal, then it becomes legally binding and the court and all creditors are informed of the result of the meeting.
You make your agreed reduced monthly payments into the IVA for the agreed term. Once these have been fulfilled you will be debt free and any remaining debts will have been written off and you will have succeeded in your want to get out of debt.
Advantages of an IVA
Opting to enter into an IVA can seem preferable to bankruptcy, with more advantages.
- An IVA lasts for a fixed period, not usually more than five years, at the end of which any outstanding debts included in the arrangement will be written off.
- Any demands for payment by letter or phone will stop – your creditors are legally unable to contact you once the IVA is agreed.
- No further charges for late payment or interest can be added to any accounts covered by the IVA.
- You pay just one single payment each month, agreed with your creditors at the beginning of the IVA
- You will escape being credit blacklisted.
However you do need to be aware that your credit rating will be affected for 6 years, (not just the period of the IVA). - You know where you stand – the IVA is legally binding, so your creditors can’t make unexpected changes to the agreement, and they are not allowed to take further legal action against you as long as you keep to the terms of the IVA.
- You retain your privacy – and your dignity. An IVA is a private matter between you and those you owe money to. There is no requirement for advertising IVA’s in the local press.
- You can still run a bank account, as long as you don’t have an overdraft facility.
Disadvantages of an IVA
While the advantages outweigh the disadvantages, there are some disadvantages to consider if you’re thinking about entering into an IVA:
- If you are a homeowner and there is equity in your property (or if you have other assets of significant value), the IVA agreement may require you to release some or all of it, after 3 years for the benefit of the creditors.
- If your total unsecured borrowing is less than £5,000 you will be unable to enter into an IVA. You will also be able to afford a minimum monthly payment of £100. However rescheduling your debts may impair your credit record and is likely to increase the overall sum to be repaid.
- You will not be able to use credit cards or store cards while you are in an IVA. You will not be able to borrow any more money until the IVA comes to an end, though you may be able to change an existing mortgage or take out a new one.
If you fail to meet the terms of the IVA, you still run the risk of being made bankrupt.
What are the alternatives to an IVA
If you are a homeowner, there is another way to avoid the high costs, both personal and financial, of either bankruptcy or an IVA.
An IVA typically runs over at least five years, which can seem a very long time and be a challenge to stick with.
If there is sufficient equity in your home, you can avoid taking either route to a clean financial sheet. Within a matter of weeks rather than years – don’t forget that your credit rating will not be repaired for a further five years after discharge if you opt for bankruptcy and 6 years with an IVA – you can have turned the page, get out of debt and have your credit rating restored.
By re-mortgaging, you will not only repay your debts but you will also secure your home and avoid any fees and costs associated with entering into an IVA.
Even if you have already started IVA proceedings, you can still change course.
This route works by re-mortgaging your home, borrowing against the equity in it, to fund not only repayment of your debts but payment of all costs and fees involved.
IVA FAQ’S
What is an IVA?
An IVA is a legal process, which allows a person struggling with debt the chance to make a formal proposal to their creditors in order to get out of debt. The purpose of an IVA proposal is to prove to creditors that it would be of greater benefit to themselves and the debtor, in comparison to the debtor being made bankrupt. A creditors meeting is held and if the proposals being made are accepted by the 75% of creditors then they become legally binding on all creditors informed of the proposal. Once accepted, creditors have no alternative but to stop any future interest and charges accruing on the outstanding debts.
On successful completion of the IVA the debtor will be considered debt free. Any outstanding balances are written off (known as a composition of debts) and the debtor is then free to start with a clear debt record.
Who can enter an IVA?
anyone whose debts surpass £5,000.
Will I lose my house?
No. If there is equity in the property then it may be requested that you should re-mortgage to use some of the money to pay towards your debts.
Can I stay in Business?
Yes you can continue trading.
Will it affect my job?
Most jobs will not be affected but if you are in the financial services sector or are worried that an IVA will affect your position you should check the terms and conditions of your employment.
Will it become public?
No an IVA is a private matter between you and your creditors.
How long does an IVA last?
An IVA usually lasts 5 years
Can all my creditors be included in the IVA?
All unsecured debts can be considered. You cannot include secured loans against your property.
Can I still opt for an IVA if a bankruptcy Order has been made against me?
It is cheaper for you to set up an individual voluntary arrangement before you become bankrupt but you can still propose one afterwards.
What happens if I cant maintain payments on the IVA?
During your arrangement it is important that you endeavour to make every payment as set down in the terms. However, if you need to miss a payment for any reason, this may be agreed with your IP. However, creditors often stipulate that no more than one or two payments can be missed during any 12 month period. There is also the possibility of being declared bankrupt if you keep missing payments.
What happens once I finish paying my IVA?
Once you have made your final payment (as specified in the terms of your agreement), you will be cleared of all debts included within the arrangement. Any outstanding balances of these debts will be written off and you will be free of these debts.
Can I enter an IVA if I am a homeowner?
Anyone can undertake an IVA as long as they are able to stick to its terms.
Do I have to tell anyone?
No.
Will an IVA cover all my debts?
An IVA will cover all your unsecured debts. An IVA will not cover student loans.