Individual Voluntary Arrangement (IVA)
An IVA enables you to repay your unsecured debts at an affordable rate over an extended period of time. It offers an alternative to bankruptcy and protects you from creditor legal action.
What is an IVA?
An IVA is a formal and legally binding agreement with creditors to repay your unsecured debt over an extended time period, typically five or six years. As long as you adhere to the IVA conditions, any debt remaining at the end of the term is written off.
A licensed insolvency practitioner (IP) sets up and administers the IVA. They make the original proposal to creditors, receive your monthly repayments, and distribute them as agreed in the arrangement.
Who can apply for an IVA?
You may be eligible for an IVA if you owe money to two or more unsecured creditors, you are struggling to meet repayments, and believe your debt situation will only worsen if you take no action.
Applicants typically owe debts of around £7,000 or more to at least two creditors, and have a regular income with a minimum monthly surplus of around £80 once essential living expenses have been paid.
What is the criteria for an IVA?
Individual Voluntary Arrangements are only available to residents of England, Wales, and Ireland. If you live in Scotland, a Scottish trust deed may provide similar benefits and is generally regarded as an IVA equivalent.
The IVA must provide a better return for creditors than bankruptcy, and although there is no stated official minimum debt level or income amount, you may qualify for an IVA if you have:
- At least £7,000 in unsecured debt and you are struggling to make the contractual repayments
- A minimum of two unsecured creditors
- A regular income
- Surplus income of £80 or more
What debts can be included in an IVA?
Unsecured debt, also known as ‘non-priority debt,’ can be included in an IVA, which includes but is not limited to:
- Credit cards
- Store cards
- Personal loans
- Bank overdrafts
- Payday loans
- Gas, electric, water, and council tax arrears
- Income tax and National Insurance arrears
This means that secured loans are not included in an IVA, nor are court fines, student loans, or TV licence arrears.
The IVA process
Your financial situation is assessed by a licensed insolvency practitioner who establishes whether an IVA is the most suitable solution. They will look at your income and outgoings, assets and debts, and formulate a proposal to present to your creditors.
If 75% or more (by value of debt) of your creditors vote in favour, the IVA comes into force and you are protected from further legal action as long as you adhere to the terms. Monthly repayments are made to the insolvency practitioner who distributes them according to the agreement.
IVAs generally last for five or six years – any debt remaining after this time is written off. At the end of the term you should receive a completion certificate that confirms you have made all the repayments.
What are the advantages?
- Interest and charges are frozen
Additional charges and interest can considerably increase debt levels, and make previously manageable monthly repayments unaffordable.
- No contact with creditors
Once the IVA is in force, creditors can no longer contact you – the licensed insolvency practitioner makes contact on your behalf.
- Threat of legal action is removed
Creditors are unable to take action through the court in relation to the debts included in the IVA, as long as you keep up the repayments – this protects you from being forced into bankruptcy.
- A fixed term arrangement
An IVA is a fixed term agreement generally lasting for 60 or 72 months – this allows you to plan for the future.
- Professional supervision
The involvement of a licensed insolvency professional ensures your monthly repayments are affordable, and that the IVA is the best solution for you.
What are the disadvantages?
- A minimum proportion of creditors need to vote in favour
Acceptance of an IVA relies on 75% of creditors voting in favour
- Potential release of equity from property
If you have a certain level of equity in your property, it may need to be released towards the end of the IVA to boost creditor returns
- Damages credit rating
An IVA remains on your credit file for six years, and can damage your ability to borrow in the future
- Listed on a public register
IVAs are listed on the Individual Insolvency Register, which is publicly viewable
- Potential bankruptcy if the IVA fails
If you fail to keep up with the IVA repayments, creditors or the IP supervising the arrangement may be able to petition for your bankruptcy
IVA vs Bankruptcy
Individual Voluntary Arrangements were originally introduced as an alternative to bankruptcy for people in serious debt. IVAs offer flexibility and a fixed timescale, which although much longer than bankruptcy, allows you to deal with your debt whilst retaining your largest asset if you are a homeowner.
Bankruptcy involves the loss of all your assets, typically including your home, and although a bankruptcy order usually only lasts for 12 months, this route is often seen as a last resort. It still allows for a fresh start, however, and may be your only option if you have few assets and no regular income.
What happens if I miss IVA payments?
Although there is a degree of flexibility built in to an IVA, it is imperative that you inform the supervising IP if your circumstances change and you are likely to miss any payments. If you have suffered a drop in earnings, job loss, or ill health has affected your ability to earn, the supervisor may be able to renegotiate the monthly repayment amount.
Your IP will also review your circumstances on an annual basis to evaluate whether repayments can be increased, or indeed if they need to be lowered so you can continue to meet your obligations through the IVA.
Is an IVA right for me?
An IVA may be the right solution if you owe a high level of debt to more than one creditor, and earn a regular income. You must have sufficient surplus income to make a regular monthly repayment once your essential living expenses have been taken into account.
For more information on IVAs our experts at UK Debt can help. We offer independent professional advice and offer a free initial consultation.