Individual voluntary arrangements - an overview
An Individual Voluntary Arrangement (or IVA) is a method of settling a person’s debt which cannot be paid in full. Generally the agreement involves paying as much back to creditors as possible over a 5 year period. At the end of the IVA, if there is any debt left outstanding, this is written off by the creditors leaving the individual debt free.
The IVA is a legally binding agreement covered by a part of the law called the
Insolvency Act of 1986. This means that once agreed, creditors cannot change their mind and take further action to enforce the payment of their debt.
When considering whether to accept an IVA, creditors will compare the return they are likely to get with what they might receive if the individual decided to declare bankruptcy. In this way, although the IVA may often result in creditors receiving back less than they are owed, they will receive more than they would in a bankruptcy situation. This is the fundamental reason why IVAs are acceptable to creditors.
The advantages of an individual voluntary arrangement
• A standard IVA is made up of a single affordable monthly payment covering all creditors. The payment is based on disposable income.
• Payments are made for 5 years. After this, the agreement will come to an end and any outstanding debt is written off by the creditors. Often more than 50% of debts will be written off using an IVA.
• All future interest and charges are frozen as soon as the IVA is put in place.
• The agreement is legally binding. This means that once agreed, creditors cannot take any further action to collect their debt. In addition, actions taken in the past such as County Court Judgements will be overturned.
• Unlike bankruptcy, an IVA is a private and discreet procedure. No-one is told about the agreement.
• Directors of a limited company can enter into an IVA and continue in their position.
• Because the IVA has a specific end date, you know exactly when you will be debt free giving something to plan for and light at the end of the tunnel.
The disadvantages of an individual voluntary arrangement
• The monthly payments in an IVA are fixed. However if your circumstances improve during the IVA, the amount you pay each month may increase.
• All of your unsecured debts must be included in an IVA. You do not have the flexibility of leaving any debts or lines of credit outside the agreement.
• If you are a home owner, you will have to release available equity
from your property so that the overall amount you pay back to your creditors is increased.
• If you enter into an IVA and then find you are unable to maintain your agreed payments, then the IVA may fail and you risk being made bankrupt (although it may be possible to reduce your payments with the agreement of the creditors).
• Entering into an IVA will negatively affect your credit rating. This will mean that you will not be able to take further unsecured borrowing for the duration of the IVA. (although it is possible to take a mortgage or re-mortgage in certain circumstances).
Is an individual voluntary arrangement suitable for me?
Because an IVA results in unpaid debt being written off, it is ideal for people who would struggle to repay their debt in full within a reasonable period of time using a debt management plan. This is particularly the case for home owners as an IVA also enables them to maintain control of their property. Bankruptcy would not be an option in this instance because of the likelihood that the property would be sold by the official receiver.
You can consider an IVA solution if your total unsecured debt is a minimum of £18,000 or above. There is no upper limit of debt which can be dealt with through the IVA process. An IVA could be a good solution for the following circumstances:
• If you have unsecured debts of more than £18,000 which you cannot repay in full within a 5 year period and can afford the minimum required return for creditors
• If you are a homeowner and want to maintain control of your property that would be lost in bankruptcy
• If you are a company director and want to maintain your position or other profession who requires a discrete non public debt solution.
The IVA is a discrete procedure. Unlike bankruptcy it is not advertised in the local newspaper (although it will be listed on the insolvency register which is available on line). As such, an IVA is idea for professionals, members of the armed forces and police who do not want the fact that they are insolvent to be publicised. Company directors can also use an IVA where as in bankruptcy they would be forced by law to give up their position.
How much does an individual voluntary arrangement cost?
When you undertake an IVA, you need to use a licensed insolvency practitioner. The insolvency practitioner will charge fees for both negotiating the IVA with your creditors (a nominee fee) and then for the ongoing management of the IVA over the 5 year period (a supervisor fee).
It is important to understand that you will not have to pay the nominee and supervisor fees yourself. They will be taken directly from the monthly payments that you make into your IVA. For this reason, you will not have to find extra money over and above your agreed IVA payment each month to pay these fees.
Depending on the company you use to implement your IVA, you may be asked to pay an instruction fee. This fee is paid over and above your IVA payments before the IVA is put in place. The size of this fee will generally depend on the policy of the company you work with and whether your circumstances are particularly complex.
Next Steps
An individual voluntary arrangement may be ideal to resolve your debt problem. However, before you choose to carry out this type of solution, it is important that you understand all of the possible alternatives available.
Reading the rest of this guide is a good place to start. However, the best way to really understand your financial situation and decide on the correct course of action is to speak to an expert.
Beat My Debt provides a free debt advisory service and will be happy to give you advice and guidance. We can be contacted in the following ways:
Email advice@beatmydebt.com
On-Line Forum www.beatmydebt/forum/
Free Phone 0800 077 6180