An Individual Voluntary Arrangement (IVA) is a legally binding agreement between a person and their creditors to pay back their debts.
For some people, an IVA can be the difference between debt repayment and bankruptcy, but how do they work? In this guide we will explain how an IVA works, how you know if you qualify for an IVA, and where you can get the advice you need if you find yourself struggling to repay your debts.
First, let’s look at what an IVA is.
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What is an IVA?
An Individual Voluntary Arrangement, or IVA, allows you to merge multiple debt payments into a single monthly payment. These monthly payments will divided among your creditors. Unlike Debt Relief Orders, for example, IVAs protect your home, car, and other assets from legal action by lenders.
The terms put in place at the start of your IVA will establish a clear route towards a life free from debt. Provided you maintain your repayments for the length of the contract, which usually lasts five years, the process will end with your debts being written off as paid in full.
While an IVA is an attractive proposal for those struggling with financial problems, it’s important to be aware that, once started, you are a member of a legally binding contract. The best advice is to ensure you understand the benefits and risks before you begin – if you’re not sure, you should consider contacting a debt charity for money advice and more information on repaying your debts.
How do you know if you qualify for an IVA?
IVAs are a great way to pay back debts if you’re struggling with your current debt level, but feel you would be able to pay back a portion of your total debts with smaller monthly payments. In order to get an IVA, however, you need to meet certain criteria.
An IVA may be a useful debt solution for you if you:
- Live in England, Wales, or Northern Ireland (In Scotland, Trust Deeds are a similar solution)
- Owe money to multiple creditors (two or more)
- Have debts in the amount of £6,000 or more
- Can afford monthly payments of at least £80 per month
IVAs are demanding, and can impact your lifestyle. The process involves dedicating a significant portion of your money towards repayments. You should always seek debt advice before committing to this kind of arrangement.
Are there restrictions on who can use an IVA?
An IVA is a flexible solution – there’s no minimum or maximum amount of debt which can be included. Provided you are resident in England, Wales, or Northern Ireland, and aren’t under a bankruptcy order, for example, there are few barriers to you using an Individual Voluntary Arrangement.
The main restrictions on using an IVA apply to the types of debt which can be included, and certain considerations for homeowners.
Types of debt
Most types of debt can be included in your IVA proposal. Debts that are eligible include:
- Credit cards
- Store cards (a credit card you can only use with one store or chain)
- Student loans
- Payday loans
- Debts to family and friends
While most types of debt are eligible, there are certain exclusions, such as council tax arrears, child support arrears, or any legally enforceable fine, like court or traffic fines. Secured loans will also excluded from the proposal – the typical example of a secured loan would be your mortgage.
IVAs for homeowners
In the case of your mortgage, it is highly unlikely that it will be included in your IVA proposal. That’s because the debt is already secured against your home. It is possible for approval to be given to mortgages provided your lender agrees to the proposal, but it is very uncommon.
Your mortgage repayments will still be safeguarded during an IVA, however. Your Insolvency Practitioner will only propose repayments which take your mortgage amount into account, ensuring people are left with enough money to keep a roof over their heads.
How do you set up an IVA?
The first consideration you will need to make is how to set up an IVA. It’s not possible for people to do it themselves, which is where your Insolvency Practitioner (IP) comes in. Your IP is your representative in all matters relating to your repayment plan. They will manage your IVA, and offer you money advice and guidance along the way.
You can find an IP via the Insolvency Service website, or one may be assigned to you if you are working with a debt advice company or debt charity.
Make sure whichever IP is offering you advice is accredited by the Insolvency Practitioners Association, or authorised and regulated by the Financial Conduct Authority (FCA). If they are not authorised and regulated by one of those two bodies, you should look for advice elsewhere.
One you have found an IP, whether through the Insolvency Service or some other way, they will take the lead on setting up an IVA on your behalf, taking into account factors like your debt level, income, credit history, and overall financial situation.
How long does it take for an IVA to be set up?
If you decide an IVA is the right debt solution for you, it can be set up relatively quickly – the general advice is that, barring any unforeseen circumstances, your IVA could be ready to go in a period of 4-6 weeks.
Before they begin setting up your IVA, your Insolvency Practitioner may petition your creditors to stop them taking action against you while the agreement is being arranged. Next, they will take a look at your finances.
Your IP needs to know your income so they can judge what people can afford to repay. They will need access to your bank statements, credit record, and any assets that you have – whether that’s a house, a car, or access to an upcoming lump sum like an inheritance.
Next, they will need to know about your debts – how many creditors you have, how much money you owe, and what types of debts are involved. It’s very important you give an accurate account, so each debt can be included in your monthly repayment plan. Once your IP has all that information, they will draft an IVA proposal to submit to your creditors, and wait for it to be approved.
Who handles payments to creditors during an IVA?
In addition to setting up your IVA, you Insolvency Practitioner has a second important function, which is to distribute payments to your creditors during the agreement. Once your IVA is approved by creditors, you will be able to consolidate all your debts into a single monthly amount to be shared.
The Insolvency Practitioner also deals with any fees and charges, and will give you a detailed report of how and when repayments need to be made.
The charges incurred by using this process are recovered from the creditors, not directly from you. This means the Insolvency Practitioner will make the appropriate deductions for their services each month before repayments are distributed to your creditors.
What happens if my circumstances change during my IVA?
Changing circumstances are common in an Individual Voluntary Arrangement. IVA holders can rely on their Insolvency Practitioner should their financial situation changes – either for better or worse. Below are a few of the most common changes people face during an IVA.
If you find your situation has changed to the extent that you are struggling to meet your monthly obligations, or if you experience sudden, short-term financial difficulties it may be possible for your Insolvency Practitioner to negotiate with your creditors in order to award you a ‘payment holiday’, which will allow you to set yourself back on the path towards repaying your debt.
Defaulting on payments can hit your credit score hard. If a change in circumstances is going to affect your long-term ability to repay your debt, the best advice is to try to reduce the level of your payments. Again, this is done by your Insolvency Practitioner, who will negotiate on your behalf.
It’s very possible your circumstances will improve during your IVA, in which case you should seek the advice of your Insolvency Practitioner. You may be able to use a cash injection to make additional contributions to your creditors, or use a lump sum to end your IVA early and kickstart the process of rejuvenating your credit file.
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What are the financial implications of using an IVA?
Although you may be eager to use an IVA to free yourself from money worries, it’s important to make sure you’re aware of the financial consequences which may arise from this type of debt solution.
Will I owe money for the administration of an IVA?
The most immediate cost will be fees or charges for the administration of an IVA. While it’s true that you will incur charges for the management of your IVA, the costs will not come from your own income, or be met by you directly.
Instead the charges will be included in the regular payments you make each month, and will be deducted by your Insolvency Practitioner before the money is paid to creditors.
How does an IVA affect your credit rating?
If you need an IVA, chances are you don’t have a spotless credit history. Using an IVA demonstrates to potential lenders that you’ve taken steps to regain control of your finances, but the fact that you need a debt solution will still be reflected in your credit rating – the credit score you are given which determines how likely lenders are to give you credit in the future.
When you agree to an IVA, you’re automatically listed on the Individual Insolvency Register. The register carries your personal details and details of your arrangement, and that information will be publicly available until three months after your IVA ends – whether that’s in five years, six years, or longer.
Using an IVA will also be recorded on your credit report. Your credit report (or credit file) carries details of your financial situation, including debt solutions, for six years. So even if your IVA lasts for the usual five years the record will remain visible for a further 12 months – six years since you began the IVA.
It’s important you notify credit reference agencies of the end of your IVA, in order to ensure they record it. The three main agencies in the UK are CallCredit, Experian, and Equifax. You can alert them to the completion of your arrangement by sending them a letter to that effect, signed by your Insolvency Practitioner, which you can then share with creditors in future.
Will your assets be at risk if you use an IVA?
While your home may be protected by taking your mortgage or rent payments into account when you are proposing your IVA to creditors, many people using IVAs are concerned about other assets and how they will be affected by the process. One such example is your car.
Provided you can demonstrate your car is necessary, such as by making a case that you need it for work, it is likely that you will be able to keep it. This may depend on the model of car, however, as if you have a new and expensive model you may need to change it to a more affordable option in order to free up funds with which to repay your creditors.
If you have a car loan, you will not be able to include in your schedule of repayments because it’s a ‘secured debt’. Your Insolvency Practitioner should take this into account when setting up your IVA, but if you think you will struggle to keep up with payments, you should seek debt advice.
Is it worth getting an IVA?
Whether an IVA is a worthwhile solution for you depends entirely on who you are and what your financial circumstances are like. If you have debt you can’t cope with, however, and you feel you would benefit from repaying it in smaller chunks over time, it might be wise to seek debt advice.
IVA Plan are experts in all things IVAs – from offering free debt advice, to helping you gather the information you need to set up an affordable debt repayment plan. Our advisers use all of their experience to work on behalf of people like you.
Advantages of using a How does an IVA work?
- Your debts are united in a single affordable payment, made each month towards your IVA
- You are protected from legal action
- You can clear your debts effectively while avoiding bankruptcy
- Your home will be protected provide you keep up payments, it offers more protection for your home.
- Your Insolvency Practitioner will take on the responsibility of dealing with your creditors and negotiating on your behalf
- Your total debt will not increase, with charges and interest are frozen during the IVA
- Your debts are either written off or repaid by the time you arrangement is concluded
Disadvantages of using a How does an IVA work?
- Your details, although limited, will be added to the Individual Insolvency Register, where they can be accessed until three months after the arrangement concludes
- Details of your IVA will be available on your credit report for 6 years
- Your overall debt may risk if your IVA fails and its cost is added to the total
- Your employment may be affected
- Your protection from creditors is only guaranteed by sticking to the terms of this legally-binding agreement
- Terms of existing hire purchases may be affected