When considering a debt solution like an IVA, most people’s first thought is how long they’ll be required to make monthly payments and stick to a strict budget.
However, while an IVA is shorter than many other debt solutions, you may still be able to leave earlier than planned if you meet certain qualifying criteria.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a formal agreement between you and the people you owe money to (your creditors) to repay a portion of your unsecured debt through a series of monthly instalments.
Because an IVA is a legally binding agreement, it must be managed by an Insolvency Practitioner (IP) licensed by the Insolvency Practitioners Association (IPA). Their main responsibilities are to communicate with your creditors and distribute your monthly payments.
During an IVA, you’ll make a monthly payment to your IP on the same date each month. The payment – which will take your essential living costs into consideration – will then be distributed evenly among your creditors.
One of the main advantages of an IVA is that all interest and charges on the debt will be frozen and your creditors won’t be able to contact you, ask you for payment, or threaten you with legal action.
How long does an IVA last?
Typically, you’ll be locked into an IVA for a total of five years (60 monthly payments).
However, an IVA can be extended by an additional 12 months if you miss payments or have a payment break to help you make up the remaining money owed and ensure you repay the minimum percentage required over the course of your IVA.
This may seem like a long time to be making monthly payments, but it’s much shorter than many other debt solutions. A Debt Management Plan (DMP), for example, requires you to make monthly payments until your debt is fully repaid, which can take anywhere from five to 10 years depending on your total debt level.
Furthermore, any remaining debt outstanding at the end of your IVA term will be written off, meaning your creditors are happy to only receive a percentage of what they’re owed and have consented to you not repaying the full amount. Most creditors agree to this as they were receiving nothing towards the debt beforehand.
Once your IVA is approved, it will be added to your credit file where it will stay for six years. This means that, if you complete your IVA within the standard five years, it will remain visible on your credit report for 12 months after your final payment.
IVAs are also added to a public register called the Individual Insolvency Register (IIR) or the ‘IVA Register’. This is an online database that contains details of individuals in certain insolvency solutions, such as IVAs and Debt Relief Orders (DROs).
Despite being publicly available, the IVA Register is usually only accessed by lenders, banks, landlords, and some employers when they need to check your creditworthiness.
Can you pay an IVA off early?
Most IVAs take five years to complete, but you may be able to exit your IVA early under certain circumstances.
For example, if you receive a lump sum payment (inheritance, lottery win, or bonus) at any point during your IVA, it might be an option to put some or all of it towards your arrangement, allowing you to walk away from your debt sooner than planned.
Most people who leave an IVA early do so because they receive a financial gift from a friend or family member. However, you must be able to prove that the individual who gifted the money is aware that it will go towards helping you settle your debts and leave your IVA early.
There are various factors you must consider before you agree to pay your IVA off early and it’s important you don’t agree to anything until you know all the facts.
How do I settle my IVA early?
There are certain steps you must follow to be able to settle your IVA early. We’ve outlined them below:
Make an early settlement offer
Before you can settle your IVA early, you must reach out to your IP with an offer of an early settlement or full and final settlement. This is essentially the amount of money you are prepared to contribute towards your IVA to be able to leave it early.
Usually, an IP will only agree to you making an early settlement offer if they deem it ‘reasonable’ (equal to or more than your remaining debt) and believe it is likely to be accepted by your creditors.
Attend a variation meeting
The next step in the process is your IP scheduling a variation meeting. This is an opportunity for your creditors to discuss varying the terms of your IVA and vote on whether it’s a good idea.
Just like your IVA proposal, the creditors to which you owe 75% of your debt must agree to an early settlement for it to go ahead. Most creditors will accept an early settlement offer if you have a good reason for doing so and can prove that the money came from a legitimate source.
Receive a final decision
Once the creditors responsible for 75% of your debt accept your early settlement offer, you should be able to leave your IVA early and settle your debts sooner than planned.
However, if your creditors reject your early settlement offer, you’ll be expected to resume your IVA and continue making payments as normal until your original end date.
How much do I need to pay off an IVA early?
Because each IVA is unique, the amount of money needed to leave early will differ from person to person and depend entirely on the amount of debt still left to pay.
The settlement figure will also be determined by your creditors and, even if your IP is confident it will be accepted, there’s no guarantee that it will – especially if your creditors will be at a loss if they accept it. Generally, the closer to your remaining debt you can offer, the more likely it is to be accepted.
For example, if you currently pay £150 a month into your IVA and there are still 20 months of your five-year term left, your remaining debt will sit at £3,000. The amount you propose will therefore need to be more than or as close to £3,000 as possible to be accepted by the majority of your creditors.
Remember, as long as 75% of your creditors by value accept your early settlement offer, your IVA will proceed as if 100% of your creditors have accepted it and you’ll be able to leave your arrangement early.
What should I do if I’m struggling with my IVA payments?
IVA payments are calculated in a way that means you should always be able to afford your debt repayments and your essential living costs.
However, sometimes life can get in the way and you find yourself in a situation where you can no longer afford to make payments as originally agreed through no fault of your own. For example, if you lose your job, split up with a partner, or a loved one gets ill.
When this happens, your first action should be to contact your IP and explain the situation. They may let you extend your payment date, pay less for a few months or the rest of your IVA, pay nothing for a set period, or settle your IVA early.
This should ideally be done before you miss a payment to avoid receiving a ‘notice of breach’ from your IP. This is a letter asking you to explain why you missed a payment and what you should do to resolve the situation before it escalates.
Usually, you’ll have one month to respond to a notice of breach. Responding within this time will stop your IP from taking any further action against you and you’ll be free to continue making payments towards your IVA as normal.
Failure to respond to a notice of breach or missing more payments can lead to your IVA being terminated. When this happens, you’ll become responsible for the debt again and your IP can make you bankrupt.
What happens after I pay my IVA off early?
Knowing what happens after you pay off your IVA early can help you prepare. We’ve outlined some of the key things that will happen below:
Your credit score will improve
Now that you’ve completed your IVA and put your debts behind you, you can shift your focus to rebuilding your credit score.
However, it’s worth noting that the IVA will remain on your credit file until the full six years have elapsed and this can make borrowing money difficult – even after you’ve made your final payment and exited your IVA.
For the best chance of getting accepted on a loan or a mortgage, consider waiting until the IVA drops off your credit report.
Your payment schedule will end
One of the biggest changes after completing an IVA is that there will be no more monthly payments required from you – even if you only repaid a certain percentage of your debt over the course of your IVA.
Remember, because your creditors won’t get any more of the money they are owed after you make your final payment, your early settlement offer must be as close to your remaining debt level as possible.
All restrictions will be lifted
Being discharged from your IVA means all the restrictions placed on you for five years will be lifted.
This means you’ll no longer need permission to access further credit or be required to provide proof of your income and expenditure each year and you can accept windfall clauses without declaring them.
You’ll be declared debt-free
The end of an IVA signifies the end of a life dealing with unaffordable debt, provided you don’t have any other debts that you didn’t include in the arrangement.
Most IVA providers will send you a ‘certificate of completion’ to prove that you’ve made your final payment and no longer owe anything towards the debt. This is usually sent within three months of you making your final payment but timescales can vary if there are any issues preventing your IVA from being officially closed.
Your details will be removed from the IVA register
Typically, your IVA will be removed from the IIR within three months of you making your final payment.
This is supposed to happen automatically but you should contact the Insolvency Service and query why it’s still visible if it hasn’t been removed after this time.
Is it a good idea to settle my IVA early?
Settling your IVA early might sound like a dream come true – especially if you’ve been making monthly payments for up to three or four years.
However, it’s not a decision that should be made lightly and you must ensure you’ve done your research and discussed the idea with your IP before agreeing to anything.
There are various pros and cons associated with paying off an IVA early and you shouldn’t make a decision until you’ve weighed them up. For example, while you’ll no longer be bound by legal restraints and will be free to spend your money as you wish, your credit score will still be impacted until six years have passed since you entered the IVA.
Before applying to settle your IVA early, don’t hesitate to seek independent advice from a financial advisor or debt management company. They will review your financial situation and let you know whether early settlement is likely to be an option for you given your current circumstances.
Conclusion
Despite being one of the shortest debt solutions with an average completion time of five years, you may be able to leave an IVA early by making your creditors an early settlement offer. Generally, the closer this offer is to your remaining debt level, the more likely your creditors are to accept it.
However, settling your IVA early isn’t guaranteed to fix all your financial problems and your arrangement will still be visible on your credit file until six years have passed since you entered it. For some people, simply continuing with their monthly IVA payments makes more financial sense.
Always get a second opinion before settling your IVA early and don’t hesitate to reach out for expert help and advice if you need it. The more information you gather, the more equipped you can be to make an informed decision.
