Individual Voluntary Arrangement (IVA)

In this guide, we explore IVAs, including the criteria you need to meet to enter into one, how to apply for an IVA, and the alternative debt solutions that can provide financial relief for those seeking to regain control of their finances.

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An Individual Voluntary Arrangement (IVA) is a lifeline for individuals in the UK grappling with unaffordable debt.

This legally binding-agreement offers a structured path to financial recovery by consolidating debts into manageable payments. 

In this guide, we explore IVAs, including the criteria you need to meet to enter into one, how to apply for an IVA, and the alternative debt solutions that can provide financial relief for those seeking to regain control of their finances.

What is an Individual Voluntary Arrangement?

An Individual Voluntary Arrangement (IVA) is a legally-binding debt solution available in the United Kingdom.

It’s a formal agreement between an individual and their creditors, allowing the debtor to repay their unsecured debts through manageable, structured payments. 

IVAs provide a structured way for people with unaffordable debt to regain control of their finances while avoiding the need for bankruptcy. 

This arrangement typically lasts for five to six years, during which the debtor makes regular payments, and any remaining debts are typically written off upon successful completion of the IVA.

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Who qualifies for an IVA?

To qualify for an Individual Voluntary Arrangement in England, Wales and Northern Ireland, an individual typically needs to meet certain criteria, including:

Have £6,000 or more of unsecured debt: IVAs are typically suited for individuals with a substantial amount of unsecured debt, such as credit card debt, personal loans, or overdrafts.

Owe money to two or more creditors: IVAs involve multiple creditors, and you should owe money to at least two of them to be eligible.

Live in England, Wales or Northern Ireland: IVAs are specific to these regions, and other parts of the UK have different debt solutions, such as the Trust Deed in Scotland.

Have a steady income: You should have a consistent source of income to make regular payments towards the IVA.

Typically, you need to demonstrate the ability to pay at least £100 per month.

It's important to note that these are general guidelines, and eligibility criteria can vary depending on individual circumstances and the specific terms negotiated with creditors. 

Seeking professional advice from a debt advisor or Insolvency Practitioner is crucial to determine if an IVA is the right debt solution for your situation.

What debts can be included in an IVA?

An Individual Voluntary Arrangement (IVA) can include a wide range of unsecured debts. Unsecured debts are those that are not backed by collateral or assets, making them eligible for inclusion in an IVA.

Eligible Unsecured debts

  • Personal loans
  • Credit card debts
  • Store card debts
  • Overdrafts
  • Payday loans
  • Catalogue debts
  • Council tax arrears
  • Utility bill arrears (e.g., gas, electricity, water)
  • Tax debts (e.g., income tax or VAT)

It's essential to work with an Insolvency Practitioner to assess your specific financial situation and determine which debts can be included in your arrangement, as individual circumstances may vary.

What debts are excluded from an IVA?

IVAs are designed to help people deal with unsecured debts. As such, secured debts - debts secured by an asset like your home or car - aren't covered by the arrangement.

Ineligible secured debts

  • Mortgages
  • Secured loans
  • Hire Purchase Agreements

If you choose to enter into an Individual Voluntary Arrangement and you find yourself with secured debts, like mortgage or rent arrears, you will still be responsible for meeting those obligations while making monthly payments towards your IVA.

How do you apply for an IVA?

Applying for an IVA involves a structured process. Below are some of the main steps. 

1. Seek debt advice

Begin by seeking advice from a debt management company or a qualified debt advisor. They will assess your financial situation and help you determine if an IVA is the right debt solution for you.

2. Work with an Insolvency Practitioner (IP) to create an IVA proposal

Once you've sought advice and decided that an Individual Voluntary Arrangement (IVA) is the right option, collaborate with a licensed Insolvency Practitioner (IP). 

The IP will thoroughly assess your financial situation and work with you to craft a realistic IVA proposal, outlining your financial circumstances, proposed repayment terms, and how you intend to make payments to your creditors.

3. Obtain the consent of your creditors

Your IP will present your IVA proposal to your creditors, who will have the opportunity to review and vote on it.

For the IVA to proceed, it typically needs to be accepted by creditors representing at least 75% of your total debt.

4. Make your monthly payments

If your IVA is approved, you will be required to make regular monthly payments as per the agreed-upon terms.

These payments will go towards repaying your creditors over the duration of the IVA, which typically lasts for five to six years.

5. Remaining debts

Once you successfully complete your IVA, any remaining unsecured debts included in the arrangement are usually written off, giving you a fresh start.

Advantages and disadvantages of Individual Voluntary Arrangements

As with all debt solutions, there are pros and cons to weigh up when considering an IVA. Here are some of the advantages and disadvantages of entering into an Individual Voluntary Arrangement.

Advantages of a Individual Voluntary Arrangement (IVA)

  • Lower monthly payments to an affordable amount
  • Protect assets like your home or car 
  • Write off a percentage of unsecured debts included at the end of the arrangement 
  • Freeze interest on unsecured debts included in the IVA
  • Stop legal action from creditors bound by the arrangement 
  • An Insolvency Practitioner will distribute payments to creditors on your behalf
  • You may get a payment break if your situation changes.

Disadvantages of a Individual Voluntary Arrangement (IVA)

  • You’ll need to abide by spending restrictions during the IVA
  • Secured debts can’t be included 
  • Creditors could reject the IVA proposal
  • Homeowners may need to remortgage in the final year of the arrangement 
  • Any windfall over £500 will be put towards the IVA
  • IVAs are published on the public Insolvency Register 
  • Your credit score will be negatively affected

What impact will an IVA have on my life?

An Individual Voluntary Arrangement (IVA), as a legally-binding debt solution, can impact your life in various ways that it’s important to be aware of. 

Your home

An IVA can help protect your home from repossession by creditors, provided you maintain the agreed-upon mortgage payments.

However, you may be required to release equity from your property if you have substantial equity, typically toward the end of the IVA term.

Your career

In most cases, an IVA should not directly affect your current job or career.

However, some professions, such as finance or law, may have specific regulations or codes of conduct that require you to disclose your IVA to your employer or professional body. You'll also not be able to be the trustee of a charity. 

Your ability to obtain credit

During the IVA and for a few years afterward, obtaining new credit can be challenging. 

When your IVA is active, you won’t be able to borrow money over the value of £500 without the permission of your Insolvency Practitioner. Once your IVA is over, it may continue to impact your credit profile for a period of time.

How does an IVA affect my credit file?

Entering into an Individual Voluntary Arrangement (IVA) has a notable impact on your credit file and rating. 

Details of your IVA will be recorded on your credit file for six years, affecting your credit rating during this period.

Obtaining new credit during and immediately after the IVA can be challenging, as mainstream lenders may consider you a higher credit risk. 

Rebuilding your credit requires timely bill payments, responsible use of existing credit, and monitoring your credit report.

Over time, as the IVA record ages and you demonstrate responsible financial behaviour, your credit rating can gradually improve.

Who can see my IVA?

Information about your Individual Voluntary Arrangement (IVA) is not entirely private and can be accessed by specific parties:

Insolvency Register: Your IVA is publicly recorded in the Insolvency Service's register, allowing anyone, including the general public, to access information about it.

Credit Reference Agencies: Credit reference agencies maintain credit reports that include details of your IVA.

Lenders and creditors routinely check these reports, making your IVA status visible to them when you apply for credit.

Certain Employers: In industries where financial responsibility is critical, some employers may conduct credit checks on potential employees.

Your IVA could be discovered during such assessments, particularly if your role involves handling finances or sensitive information.

While an IVA affects your privacy to some extent, it provides a structured path to manage and resolve your debts.

Can you get a mortgage with an IVA?

Securing a mortgage with an active Individual Voluntary Arrangement (IVA) can be difficult.

Most mainstream lenders typically prefer borrowers who have completed their IVAs and show a history of responsible financial management afterward.

Specialist lenders may consider your application, but they often require a larger deposit and may offer less favourable terms.

To improve your chances of obtaining a mortgage after an IVA, focus on rebuilding your credit by paying bills on time, using existing credit responsibly, and seeking professional advice from mortgage advisors or brokers who specialise in cases involving IVAs.

While it may take time, demonstrating financial responsibility can increase your prospects of securing a mortgage in the future.

Can you use an IVA for joint debts?

Individual Voluntary Arrangements (IVAs) are typically designed for individual unsecured debts and do not address joint debts.

In the case of joint debts, both parties are responsible for the entire debt amount, and an IVA entered into by one person does not relieve the other joint debtor of their obligation to repay the full debt.

To manage joint debts, it's advisable to explore alternative debt solutions together, such as debt management plans or negotiations with creditors, as IVAs are not suitable for jointly held obligations.

Open communication and seeking professional advice can help you and the joint debtor find the most appropriate way to address your shared financial obligations.

How much does an IVA cost overall?

The overall cost of an Individual Voluntary Arrangement (IVA) can vary widely and depends on several factors, including:

Total Debt: The amount of debt you owe plays a significant role in determining the overall cost of the IVA.

The more debt you have, the higher the total repayment amount is likely to be.

Monthly Payments: Your monthly IVA payments will be based on your disposable income.

The higher your monthly payments, the faster you'll repay your debts, potentially reducing the overall cost.

IVA Duration: IVAs typically last for five to six years. The longer the IVA term, the more interest and fees may accumulate, affecting the overall cost.

Fees: There are fees associated with setting up and administering the IVA, including the Insolvency Practitioner's fees and court fees. These fees are typically deducted from your monthly payments.

It's essential to work closely with your Insolvency Practitioner (IP) to understand the specific costs associated with your IVA and how they will be structured.

How long does an IVA last?

An Individual Voluntary Arrangement (IVA) typically lasts for a fixed term, which is commonly five to six years.

The exact duration of the IVA depends on the terms agreed upon between you, your Insolvency Practitioner (IP), and your creditors. 

During this period, you will make regular monthly payments towards your debts as outlined in the IVA proposal.

Once you successfully complete the agreed-upon payments and fulfil all the obligations specified in the IVA, you will be considered debt-free, and any remaining unsecured debts included in the arrangement are typically written off. 

It's essential to adhere to the terms of your IVA diligently to ensure its successful completion and the opportunity for a fresh financial start at the end of the term.

Can you end an IVA early?

It is possible to end an Individual Voluntary Arrangement (IVA) early by making a lump sum payment to your creditors.

If you come into a significant sum of money, such as through an inheritance, a bonus, or the sale of an asset, you can use that money to settle the IVA before its scheduled completion date.

Here's how it typically works:

Consult Your Insolvency Practitioner (IP): Start by discussing your intention to end the IVA early with your IP.

They will help you assess whether the lump sum you have is sufficient to settle the IVA and negotiate with your creditors on your behalf.

Creditor Approval: Your creditors must agree to accept the lump sum as a full and final settlement of the debts included in the IVA.

The IP will present your proposal to them, and if the majority of creditors (representing at least 75% of your total debt) accept the offer, the IVA can be terminated early.

Legal Closure: Once your creditors accept the lump sum, the IVA is legally closed, and you are considered debt-free in relation to the included debts.

Is it possible to cancel an Individual Voluntary Arrangement?

Cancelling an Individual Voluntary Arrangement (IVA) is possible but requires careful consideration. 

First, assess your financial situation and reasons for cancellation seriously.

Then, contact your Insolvency Practitioner (IP) in writing, outlining your intention to cancel and explaining your reasons.

You may need to pay your IVA provider for services rendered, including setup and administration fees.

Upon cancellation, your debts revert to their original state, and you become responsible for repaying the full unsecured debt amount. Any legal protections provided by the IVA are no longer in effect. 

After cancellation, it's essential to reevaluate your financial situation and consider alternative debt solutions with the guidance of a financial advisor, as cancelling an IVA can have lasting financial implications.

What happens if an IVA fails?

If an Individual Voluntary Arrangement (IVA) fails, usually owing to a failure to make payments, it has significant repercussions. First, it's considered a breach of the legally binding contract, potentially leading to legal actions by creditors, including bankruptcy proceedings.

Any payments made into the IVA before its failure may not be refunded, as they cover administrative expenses.

After a failed IVA, your unsecured debts remain, and you're responsible for repaying them individually to each creditor. 

This can involve legal actions, and your credit rating will be negatively affected, making it challenging to access credit for six years due to the IVA failure being recorded on your credit file. Seeking professional advice is crucial to address the situation effectively.

There is a solution for you

Alternatives to an IVA

If an IVA isn’t suitable for you, or you are considering your options, there are several other debt solutions available to people in the UK who are facing financial difficulties:

Debt Management Plan (DMP)

A DMP is an informal agreement that allows you to make reduced monthly payments to your creditors based on what you can afford. It's a flexible way to manage unsecured debts while avoiding the legal commitments of an IVA.

Debt Relief Order (DRO)

A DRO is a formal insolvency process suitable for individuals with low income, minimal assets, and debts below a certain threshold. It provides relief from debt for those who meet specific criteria, and it typically lasts for 12 months.

Debt Consolidation

Debt consolidation involves combining multiple debts into a single, more manageable loan or credit arrangement. This can simplify your finances and potentially reduce interest rates, making it easier to repay your debts.

Trust Deed (Scotland)

In Scotland, a Trust Deed is a formal arrangement for individuals struggling with unsecured debt. It's similar to an IVA in England and Wales and involves making affordable monthly payments to creditors for a set period, usually four years.

These alternatives to an IVA offer various advantages and are suitable for different financial situations. It's essential to assess your unique circumstances and seek advice from a debt advisor or financial expert to determine which debt solution aligns best with your needs and goals.

Key Takeaways

  • An IVA is a UK legal framework for consolidating unmanageable debt into manageable payments
  • Eligibility includes having over £6,000 in unsecured debt, multiple creditors, stable income, and living in England or Wales
  • They typically span 5-6 years, post which the remaining debt may be cleared
  • The process involves debt consultation, drafting a proposal with an Insolvency Practitioner, gaining creditor consent, and adhering to scheduled payments
  • IVAs can fail if you fail to make payments as originally agreed
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