An IVA is a legally binding agreement between you and your creditors and there can be serious consequences for failing to stick to the rules outlined in your IVA proposal.
IVA failure is rare and you’ll usually be given plenty of opportunities to make up for the missed payments before your arrangement is officially terminated, but it doesn’t hurt to be prepared.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a formal debt solution designed to help you repay your unaffordable debt through a series of smaller, more manageable payments. Because it’s a legally binding agreement, it must be authorised by an Insolvency Practitioner (IP) and you and your creditors must stick to it.
During an IVA, your creditors won’t be able to contact you or add interest or charges to the debt as long as you make one monthly payment to your IP. They will then distribute the money equally among your creditors.
Once you’ve made your final monthly payment, any remaining debt will be written off and your IVA will officially come to an end – even if you’ve only repaid a small portion of your outstanding balance. This will leave you free to rebuild your credit score and move on from your debt.
How much debt do you have?
How long does an IVA last?
The average IVA lasts five years, but your payment schedule can be extended by 12 months if you miss payments, have a payment break, or are unable to release equity from your home and need to make up for the extra money owed.
IVAs also stay on your credit file for six years from the date they are approved. Therefore, if your IVA lasts the standard five years, it will remain on your credit report for another year after you make your final payment.
The Insolvency Act (1986) doesn’t, however, state how long an IVA should legally last, meaning that it could, in theory, last up to seven years under certain circumstances. The IP assigned to your case will set the length of your IVA before it begins.
Similarly, your IVA can be shortened if you’re able to pay off the debt in less than five years through a lump sum. This is called making a ‘full and final settlement’ and can be an option if you receive a windfall payment that’s equal to or more than your remaining debt.
What rules do I have to stick to during an IVA?
During an IVA, you’ll be expected to stick to certain rules to ensure your arrangement is successful and runs as smoothly as possible. We’ve summarised them below:
Applying for further credit
There is nothing stopping you from borrowing money in an IVA, but you must obtain permission from your IP to borrow more than £500. They will take your circumstances into account and decide whether or not they think it’s a good idea for you to enter into another credit agreement.
However, it’s important to note that even if they give you the go-ahead to apply for further credit, they can’t guarantee that your application will be approved. Most lenders will only agree to lend to someone in an IVA if they accept higher interest rates and stricter terms to offset the extra risk.
Accepting a windfall payment
Most IVAs contain a windfall clause stating that any large sum of money obtained during your IVA (e.g. a bonus at work, an inheritance, or a lottery win) must be paid into your arrangement.
The specific terms and conditions of your IVA will dictate whether you can keep any of the money, but you may be able to keep all of it if it’s less than £500.
Keeping the same bank account
During an IVA, you may not be able to keep the same bank account.
However, while this is usually only required if any of the debts included in your IVA are owed to your bank, most IVA providers would recommend switching just in case and may not let you proceed with your application otherwise.
Failure to switch banks before payments are taken may result in your funds being frozen, meaning you’re unable to access or withdraw any of your own money.
Sticking to a budget
While you’re in an IVA, the majority of your disposable income will go towards your IVA and you’ll have less money to spend on non-essential expenses.
This means you’ll have to sacrifice treats like holidays, designer clothes, and dining out until your debt has been repaid.
The IP assigned to you will work with you to create a realistic budget before your IVA starts.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
How can an IVA fail?
IVAs are legally binding agreements approved by the court. Failure to stick to the terms and conditions as they’re laid out in your IVA proposal can constitute a breach of your arrangement and cause your IVA to fail.
Some of the things that can cause your IVA to fail include not keeping up with your payments, not informing your IP of a change of circumstances, accessing credit without your IP’s permission, and purposely excluding key information from your application.
Generally, your IVA will fail if you break any of the terms and conditions that you and your creditors agreed to in your IVA proposal.
What happens after an IVA fails?
Several things happen after an IVA fails. We’ve listed the most important things to know below:
You’ll receive a letter of termination and a failure report
When your IVA fails, you’ll receive a letter of termination and a failure report confirming the termination of your IVA and why it failed.
The failure report will list information about your creditors and how much they have been paid so far throughout your IVA so far – this will let you know how much you still owe towards your debt. Remember, it is your responsibility to arrange another form of payment.
You’ll become liable for the debt again
With no IVA in place, any remaining IVA funds will be distributed among your creditors and you’ll become liable for the debt again. This also means that your creditors will be free to take legal action against you if they wish.
Although your IP will inform your creditors that your IVA has failed, they’re not obliged to help you find another way to pay your debt and you must arrange an alternative repayment plan as soon as possible.
Your entry will be removed from the register
The Insolvency Service will be informed that your IVA has failed and your entry will be removed from the Individual Insolvency Register (IIR) within three months.
However, your IVA will be marked as ‘failed’ on your credit file and will remain on your record for a total of six years from the date it started. This means that, even after your IVA has failed, you’ll likely struggle to access further credit for several years.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
How can I stop my IVA from failing?
Before an IVA fails, there are several things you can do to stop the situation from escalating. Here are some of the things you should do if you’re struggling with your IVA payments:
Contact your IP
The first thing you should do if your financial circumstances change and you’re worried about affording your next IVA payment is to contact your IP and explain the situation.
Most IPs will be willing to come to an agreement with you over how to repay the debt. This may include giving you a payment holiday of up to six months or negotiating with your creditors to accept lower payments.
Approach your creditors
Another option is to approach each of your creditors individually and try to alter the terms of your repayment schedule.
This is an important step as it can let your creditors know that you’re still committed to repaying your debt and prevent them from starting bankruptcy proceedings against you.
Do I still have to pay IVA fees after my IVA fails?
Once your IVA fails, all payments – including fees – will stop and you won’t be asked to make any more payments towards your debt.
However, you’ll be left with your remaining IVA balance which you’ll become responsible for arranging payment for.
Because IVA fees are paid through your normal monthly payments and are taken before any money is distributed among your creditors, it’s possible that if your IVA fails early on, you’ll have only repaid the IVA fees (which are non-refundable) and haven’t repaid any of the debt yet.
Can I enter another debt solution after a failed IVA?
Just because your IVA fails, it doesn’t mean that you don’t have options. Usually, your IP can arrange for a debt advisor to get in touch with you and discuss alternative debt solutions that you may be eligible for, such as a Debt Relief Order (DRO) or a Debt Management Plan (DMP).
We’ve outlined both options below so you know what your options are in the event your IVA fails:
Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a formal solution for cancelling or ‘writing off’ the debts you can’t afford to pay if your financial situation doesn’t improve in 12 months.
During a DRO, you won’t need to make any payments towards your debt, your creditors won’t be able to contact you, and all interest and charges will be frozen.
The main aim of a DRO is to give you some breathing space to deal with your debts without your balance increasing or the added pressure of being chased to make payments you know you can’t afford.
Debt Management Plan (DMP)
A Debt Management Plan (DMP) is an informal agreement between you and your creditors to repay your non-priority debts through a series of monthly payments.
During a DMP, your debt repayments to various creditors will be consolidated into a single monthly payment, making it much more affordable and manageable to juggle your financial obligations.
However, because you’ll be required to repay 100% of your debt, a DMP can last anywhere from five to 10 years.
Conclusion
When you enter an IVA, it’s important to stick to the terms as outlined in your IVA proposal to ensure you complete your arrangement and repay your debt within five years.
IVA failure is a worrying prospect and it’s normal to fear the worst, but you do have options. The key to avoiding further action, including bankruptcy, is to act quick and reassure your IVA provider, IP, and creditors that you’re committed to dealing with your debt.
Don’t hesitate to reach out for expert debt advice and inform your IP as soon as your circumstances change. The sooner you get help, the sooner you can resolve your problem debt and move on with your life.
