If you’re facing debt problems, you’ve probably heard about an individual voluntary arrangement (IVA).
An IVA is an agreement between you and the companies or people you owe money to. If you’re struggling with unsecured debt, an IVA can be used to transform your unaffordable payments into one affordable repayment amount. What’s more – any outstanding debt that you can’t afford to repay will be written off at the end of your IVA.
You could write off up to 81% of your unsecured debt today
While an IVA probably sounds appealing, there’s lots to think about – especially because your life and financial circumstances are unique to you.
Here, we’ve explored IVAs in detail – including lots of helpful information and answers to people’s most frequently asked questions.
You might not have made a final decision about an IVA when you’ve finished reading – but you’ll have a better idea about whether this kind of debt solution is worth it for you, and what you can do next if you think it might be.
What is an Individual Voluntary Arrangement (IVA)?
An IVA is a government-approved debt solution that’s designed to get you back in control of your finances.
If you’re struggling with monthly payments towards unsecured debts or finding it impossible to make ends meet after you’ve made your payments, an IVA will transform these payments into a single affordable monthly amount.
An IVA is a ‘formal agreement’ between you and your creditors (the people or companies you owe money to). This means it’s a legally binding agreement – so it has to be set up by a financial professional called an ‘insolvency practitioner’ (IP).
When you come to the end of your IVA, any amount that hasn’t been repaid to your creditors is written off, leaving you financially free and able to start building your credit rating again.
How does an IVA work?
An IVA starts with a conversation between you and an insolvency practitioner. They will look at your finances in detail, working out what you owe and how much you can afford to repay.
Your IP will propose an affordable repayment plan to each of your creditors – this is known as an ‘IVA proposal’. As long as this is approved by 75% of the companies you owe money to, this repayment plan will replace your current agreements.
Rather than pay your creditors directly, you’ll make this monthly repayment to your IP. They will split this money between the creditors.
You will continue to make your IVA payments to your IP until the end of the IVA period. Any outstanding debt that’s left when the IVA is complete will be written off and you will be debt free.
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How long does an IVA last?
The law says that an IVA can last anywhere from three months to seven years. In reality, an IVA will usually last for five or six years.
That might sound like a long time – but people often spend much longer dealing with problem debts, especially when payments are missed, debt collection firms get involved, and additional costs and interest is added to what you owe.
With an IVA, all interest and charges are frozen on your debts during this time and you cannot be chased by the people you owe for payment.
When the 5-6 year period is done, your debt is also considered done. You won’t have anything else to pay and your creditors won’t get in touch to ask for more money.
What kind of debts can be included in an IVA?
The insolvency practitioners you work with will explain exactly what can and cannot be included in your IVA – but most unsecured debts can, including:
- Credit cards
- Personal loans
- Debts to family and friends
- Bank account overdrafts
- Gas and electric arrears
- Council tax arrears
- Water arrears
- Payday loans
- Store cards
- Income tax and national insurance arrears
- Tax credit or benefit overpayments
Even things like outstanding bills can be included. So, if you have unpaid invoices from solicitors, vets, builders, or other people you might owe – these can usually be included.
Some debts cant’t be included in IVAs. They include:
- Mortgages and secured loans
- Hire purchase agreements
- Court fines
- TV Licence arrears
- Student loans
- Child support arrears
What are some benefits of an IVA?
Your interest and charges are frozen
From the moment an IVA is approved, all interest and additional charges relating to what you owe are frozen. This means you don’t have to worry about the balance going up.
You make one affordable payment
When your IVA is set up, you’ll work with your IP to decide on an affordable repayment amount.
This amount isn’t set in stone though – so if you run into problems that mean your income is reduced at any stage, your amount can be adjusted to keep your IVA payments affordable.
You’re legally protected
When your IVA is approved it is legally binding. This means that the companies and people that are included can’t break their side of the deal by contacting you or taking any further action against you.
The things you own are protected
The things you own (your assets) are considered when your IVA is set up and you won’t be asked to sell them.
Any remaining debt will be written off
Although an IVA won’t write off everything you owe, a percentage likely will be written off.
When you final IVA payment is made, you won’t owe anything to your creditors. The means you can take your finances forward and build your credit rating again.
Does an IVA have any downsides?
An IVA will impact your credit rating
Individual voluntary arrangements are recorded on the individual insolvency register and on a person’s credit file, so your credit rating will be damaged if you decide an IVA is right for you.
This will make it more difficult to get credit going forward. Although it’s likely that your credit rating may already be damaged if you’re struggling with repayments at the moment.
Not all debts can be included
Only certain unsecured debts can be included in an IVA. Some can’t – including:
- Student loans
- Child support/maintenance
- Court fines
- Social fund loans
You will need to carry on paying these throughout your arrangement. Your insolvency practitioner will make sure these things are taken into account as ‘essential outgoings’ to allow you to do this though.
You may have to remortgage
Although you won’t be asked to sell your home, you may be asked to attempt to release equity from it towards the end of your IVA. This is usually done through remortgaging your property – but depends on your unique circumstances.
Windfalls are put into the agreement
If you come into any money greater than £500 while your IVA is running you will be expected to use that to make a lump sum payment towards your outstanding debt.
This means things any money you win, inherit, get as a settlement, or receive as a work bonus will be brought into your IVA.
An IVA could fail
The fact that an IVA is legally binding works both ways – so you have to stick to your side of the agreement in the same way that creditors will stick to theirs.
Therefore, if you miss payments or break the terms of your IVA, it could fail. If it does, the companies you owe will get back in touch – and may even add additional interest and charges onto what you owe.
Who might an IVA work for?
An individual voluntary arrangement is a flexible debt solution that can work for a huge range of people. However, to qualify, you must meet the following criteria:
- Have £6,000 or more in unsecured debt
- Have debt with more than one creditor
- Have an income that will allow you to pay at least £90 per month
You must also live in either England, Wales or Northern Ireland. If you’re based in Scotland, you may decide to look into a protected trust deed – a debt solution that’s very similar to an individual voluntary arrangement.
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Is an IVA worth it if you're self-employed?
It’s perfectly possible to get an IVA if you’re self-employed – and there are some differences between a self-employed IVA and a normal IVA that make them particularly helpful for business owners.
A self-employed IVA will usually allow you to make flexible contributions rather than fixed monthly payments. This reflects that fact that a self-employed person’s income is likely to be slightly more irregular than someone on a fixed contract.
You may also be able to keep some business-related credit separate from your IVA. You’ll need your insolvency practitioner’s permission to do so – but if it helps to maintain your work and business relationships, then there’s a strong chance it will be okayed.
Do you have to pay the insolvency practitioner?
Regardless of who arranges your IVA, there will be some fees that cover what your insolvency practitioner will do. The costs involved can often be around £5,000.
Lots of people wonder if these fees make an IVA worth it – but it’s vitally important that you understand how these fees are charged before you make your mind up.
The fees that your IP charges will be included in your monthly repayments and taken from the creditors you’re paying back, meaning you don’t have to worry about making additional payments.
Different IPs do things slightly differently – but the law says they have to be upfront about fees and how they’re charged, so you’ll have a full understanding before you decide if the IVA is the right solution for you.
Will an IVA affect my credit rating after it's done?
Yes – but in a positive way. Your credit rating will start to improve significantly after your IVA is complete.
The good news is, you often don’t have to wait for it to be marked as ‘complete’ to see improvements. Since lenders tend to pay more attention to the more recent part of your credit file, you’ll probably find that your credit score improves as your IVA ages.
After six years, your IVA will be removed from your credit file altogether and will no longer have an impact. At this stage, previous missed payments and arrears from before your IVA will have been removed too – so you can work on getting your credit score looking good again.
What other debt solutions might help?
An IVA isn’t the only debt solution that’s available. When you talk to an insolvency practitioner about your financial circumstances, they may talk to you about different debt solutions, including:
- A debt management plan: an informal arrangement directly with your creditors
- Bankruptcy: a shorter-term insolvency solution but with greater impact on your assets
- A debt relief order: a way of dealing with debts if you have a very limited income
Is an IVA worth it for your health and wellbeing?
If you’re struggling with debt, you may already know that it can have an impact on several areas of your life.
Worrying about debt and money in general can:
- make it difficult to wind down
- affect your sleep
- make it harder to focus at work
- cause or worsen mental health problems – including anxiety and depression
- increase your blood pressure
- cause physical problems – including muscle tension and back/neck problems
- damage your relationships with people you care about
In fact, research shows that 50% of adults who are struggling with debt also have a mental health condition.
Insolvency solutions often make a significant difference to the way people feel about the money they owe. Knowing that you’re working towards a positive end-goal often helps – and no contact from your creditors can ease your worries on a day-to-day basis.
Is an IVA worth it?
So, by now you can probably see that there’s a lot to think about when it comes to deciding whether an IVA is worth it for you personally.
Although there’s lots of great information available online about the pros and cons of IVAs, it’s always a good idea to talk to an advisor about your personal circumstances and financial situation.
For more advice about which debt solution could be right for your circumstances, you can contact a friendly advisor by calling 0800 118 4815.