An IVA is an agreement between you and your unsecured creditors to help you pay off your debts at an affordable rate.
IVAs were introduced as a formal solution to help people with debt problems. Over time, they have emerged as a widely used debt solution in the UK.
Those who are eligible can apply for an IVA to regain financial control, write off a percentage of their debts, and start afresh.
At Money Advisor, we offer a professional, impartial review of your financial circumstances. Should an IVA be the best option, our experienced advisors will run you through the whole process before you commit to an arrangement.
You could write Off Your Unaffordable Debt
What is an IVA?
An individual voluntary arrangement (IVA) is a legal agreement between you and your unsecured creditors, that agrees with a monthly repayment plan over a period that condenses multiple debts into one monthly payment.
Since it is a formal and legal debt solution; you, as well as your creditors, are obliged to stick to it.
An IVA is negotiated by an insolvency practitioner (IP), who deals with your creditors throughout the life of the IVA, freeing you from handling the situation yourself.
The IP is also responsible for drafting an IVA proposal which is then voted on in a creditors meeting. You only need a majority of your creditors to approve your IVA offer for it to come into effect.
Once your IVA is in effect, you are protected. Your creditors will be told to cease all contact with you and contact your IP instead. They can take no further action against you.
An IVA is a form of insolvency, but it is different from bankruptcy
How Does an IVA Work?
A debt expert will begin the process by checking your income, expenses, and debt level. They will determine a monthly amount that you can realistically afford to repay each month. This amount is calculated after factoring in your essential expense and household budget, so your quality of life is not affected. They will then work with you to check out all your options. If you believe that an IVA would work best in your specific situation, you will be referred to an insolvency practitioner who will take you forward.
If you decide to get an IVA, you will work out a repayment plan with an insolvency practitioner. Details of your repayment offer are included in a formal document called an IVA proposal, copies of which are later provided to your creditors so it can be discussed and approved. We will then refer you to an Insolvency Practitioner who will then draft your IVA proposal.
If an IVA is right for you, we will determine a monthly amount that you can realistically afford to repay each month. This amount is calculated after factoring in your essential expense and household budget, so your quality of life is not affected.
Your IVA proposal is then presented to creditors in a meeting. If 75% (by debt value) of your creditor’s vote yes, your IVA becomes a legally binding agreement.
Since an IVA proposal is usually a last resort for people who cannot afford repayments currently, most proposals that meet the criteria are accepted.
Once an IVA comes into effect, you will pay be required to pay back a set amount each month, usually for five years (or 60 months) but not always; the duration an IVA lasts can vary based on many factors such as overall debt and any assets in your name.
If you maintain payments throughout your IVA, any of your outstanding debt will be written off by the end of your payment term.
In the UK, only residents of England, Northern Ireland or Wales can apply for an IVA. If you live in Scotland, check out Trust Deeds instead.
Write Off Debt With an IVA
Government debt legislation means that you may be entitled to write off a % of your debts, based on your circumstances, affordability, and the full amount of debt.
IVAs are suitable for people with a considerable debt level and as such you are only expected to pay back what is reasonably affordable for you in one monthly payment. This usually lasts 5 years, then any included unsecured debt outstanding is written off.
Below is an example that shows how our experts helped a client write off a major portion of their debt:
Debts Included in an IVA
An IVA would cover most of your unsecured debts. Debts covered by IVA include:
- Personal loans and catalogue debts
- Council Tax arrears
- Hire purchase debts
- Credit and store cards
- Mortgage shortfall
- The money you owe to HMRC e-g income tax(unless fraudulent)
- Gas, electricity, and water bill arrears
- Benefit overpayments
- Payday loans
- Informal debts from family and friends
- Joint debts, but the other person must also make payments
- Tax credit
- National insurance arrears
Debts Not Included in an IVA
An IVA does not cover most secured loans. Debts not covered by an IVA include:
- Student loans
- Social fund loans
- Court fines
- Child maintenance or child support dues
- TV license arrears
- Hire purchase agreements
- Debts accumulated through fraudulent conduct
- Certain forms of car finances
- Other secured debts
IVA Pros and Cons
An IVA has its pros and cons, just like other debt solutions. Working with a debt advisor to weigh out the costs and benefits of an IVA can help you decide if an IVA is worth it.
- You do not need to give up ownership of your home
- Fees are agreed with your creditors and factored into your monthly plan
- Single hassle-free monthly payment
- You only pay what you can afford to (*based on your income and expense)
- Interest and charges are frozen on included debts
- Upon completion, your included creditors agree to write off any outstanding balances
- Stop your creditors chasing you for payment and stop any legal action being taken against you
- Only 75% of your creditors (by debt value) need to approve your IVA proposal for it to become
- Homeowners may be required to release equity from their property
- Details of your insolvency will be recorded in the IVA register
- An IVA may negatively affect your credit rating for six years
- Your creditors can request that you be made bankrupt if your IVA fails
- No further borrowing should be obtained during an IVA. It would be difficult to obtain and should
only be obtained in extenuating circumstances
Who is Eligible for an IVA?
You need to meet the following criteria to qualify for an IVA in the UK:
- You must owe at least £5,000 of unsecured debt
- You must have more than 2 creditors
- You should have a stable source of income (employment, benefits, or pension)
- You can afford to make a minimum monthly payment of at least £80
- You must be a resident of England, Wales or Northern Ireland
How Much Does an IVA Cost?
To set up an IVA, you need to hire the services of an insolvency practitioner so there are some costs involved. An IP is a licensed financial professional (usually a lawyer or an accountant) who works out how much you can realistically repay, drafts your IVA proposal and negotiates with your creditors on your behalf.
With IVAs there are no surprise charges. Hiring an IP can cost money but you do not have to pay any additional charges or fees – your IP fees and any associated costs would be deducted from the total sum you pay to your creditors every month under an active IVA.
There are three main costs associated with an IVA. All these costs are already included in your monthly IVA payments, so you do not have to go through the hassle of arranging money or making multiple payments throughout the term of your IVA.
These costs include:
1. Nominee’s Fee
Borrowers usually have to pay a minimum of £1000 as a nominee fee.
Nominee’s fee is paid to the IP for fulfilling their role as your legal representative. It covers the logistical and admin costs involved in evaluating your financial situation, preparing an IVA proposal, and tabling it to your creditors.
2. Supervisor’s Fee
A supervisor’s fee usually ranges between 15 to 20% of payments made under an IVA but in some cases, IPs prefer charging a flat fee.
Supervisor’s fee covers the expense incurred while implementing your IVA. This includes the cost of collecting your monthly payment and disbursing it to creditors, providing debt advise, managing creditor relations as well as undertaking annual reviews.
Disbursements may vary from case to case but on average, they cost £1,2,00 per case.
Disbursements usually cover expenses your IP paid to third party companies for software licenses, insurances, or any regulation that is needed. They could also include the cost of additional services hired to offer the best returns to creditors.
How Long Does an IVA Last?
An IVA usually lasts for five years. However, in some cases, this 5-year term can be extended by another 12 months to give borrowers a chance to repay their debt according to the agreed terms.
Conversely, you also have the option of repaying your IVA earlier if you have a lump sum that can fully or partially cover your IVA payments. In some instances, borrowers can even negotiate a discount in exchange for early repayment.
What Happens at the End of an IVA?
As long as you have complied with the terms of your IVA, once it is successfully completed, the rest of your included unpaid debts are written off and these creditors cannot take further action against you.
The IVA Experience: Life During an IVA
Individual voluntary arrangements provide many people a chance to face their debt problems head-on – but before you make up your mind, it is vital to consider how an IVA can impact your everyday finances as well as your personal and professional life.
In most cases, an IVA will not impact your job. The only exception to this rule are professionals who hold a position of financial responsibility like accountants, solicitors or bankers, and those employed in the police force, prison facilities, or fire services.
Make sure you check your employment contract to find out if you need to disclose any information about your IVA to your employer. While most employers do not require people to inform them before entering an IVA, some may. That is why it is always a good idea to double-check your terms of employment.
Self-employed individuals who set up an IVA can continue operating their businesses as usual. However, they may find it more difficult to deal with their suppliers on an ongoing credit basis during their IVA.
Before you agree to an IVA, your IP will take into account any property you own. They will calculate the amount of equity you would get if you were to sell your house and pay all your mortgage to check if it is enough to fully repay your debts.
As a rule, all your properties will be included in an IVA to compute your total share of equity unless you are going through exceptional circumstances. This share is then reviewed in the last year of your IVA.
During the final year of your IVA, you will also be asked to provide an updated record of your mortgage and secured loan balance to calculate your share of the equity. If your share is at least £5000 you may be asked to remortgage your property and include 85% of your equity in your IVA.
Can You Get a Mortgage With an IVA?
If you are in an individual voluntary arrangement, getting a mortgage right away can be difficult. The best way to get a mortgage is to wait for six years until your IVA is over and it no longer shows on your credit report.
Some specialist lenders may consider you until then but you will not get better market rates until your credit score improves and creditors consider you a reliable candidate.
Setting up an IVA is the first step towards assuming financial responsibility and managing your debts more practically.
Possessions & Savings
When you set up an IVA, you retain full ownership of your belongings. Even though you will be required to include details about valuable assets in your IVA proposal, your possessions enjoy protected status under an IVA.
This means that while creditors can request you to sell certain possessions to repay them, your consent is a prerequisite and they cannot force you to do so if you do not want to. Moreover, all your household and domestic goods are excluded from your IVA by law.
Some essential items you will never be asked to sell include:
- Electrical appliances like computers, televisions, and phones
- White goods like refrigerators and washing machines
- Cooking items and kitchen equipment
- Children’s items
- Furniture, fixtures, and fittings
- Medical aids like mobility scooters and wheelchairs
It is vital to tell your IP about any valuable assets you own so they can come up with a realistic estimate of how much you can afford to pay into your IVA every month. Let them know if you have any:
- Insurance policies
Bank Accounts, Savings, and Pensions
Bank Accounts in an IVA
Banks can exercise their ‘right to offset’ by automatically deducting payment towards debt from your bank account. This can cause problems for you and leave you with insufficient funds to meet essential living expenses.
The only way to prevent this from happening is to change your bank accounts. You need to open up a new bank account and switch to it if:
- You owe money to your bank
- Your bank owns a company which is a creditor
- Both your bank, as well as the company you owe money to, are owned by the same umbrella company
Savings in an IVA
Any savings you have will also be included in your IVA. Your savings can also help you decide what type of IVA to go for.
Pension in an IVA
Your IP will review records of any pension contributions or payments, including the state pension, before drafting your IVA offer. If you are making personal pension contributions, your lenders can ask you to stop making payments and pay the amount to them instead.
If you are aged 55 or above and you have a ‘defined contribution’ pension that you have not started withdrawing, you will not be expected to include it in your IVA, though you can if you want to.
How to Manage an IVA
You do not have to manage an IVA all by yourself. You can always go to your insolvency practitioner for debt help, assistance, and advice – but you still have to fulfil your core responsibilities which include:
- Paying your monthly sum on time: Lagging on your repayment schedule or missing repayments is a breach of your IVA. Your IP can terminate your arrangement if you fail to make contributions on time
- Submitting your documents: You will be required to submit relevant documents for an annual review. This can affect your monthly contributions, driving them up or down based on your affordability.
- Keep your IP updated: You must inform your IP if your financial situation changes. Failure to inform them of any income changes, employment status, change in address, forgotten debts, or windfalls like lottery wins or inheritance can jeopardise your IVA.
Types of IVA
There are different types of individual voluntary arrangements to choose from. The type you pick depends on a range of factors such as your debt level and profession. IVAs broadly fall into three main categories:
- If you are Self-employed
- Sole or Joint IVAs
- Full and Final IVAs
Let’s examine each one in detail so you can work with your IP to pick the right solution for yourself:
IVAs set up for self-employed borrowers work the same way as IVAs for employed people – except there are a few key differences:
a. Seasonal Income:
Self-employed IVAs are typically more flexible. This helps accommodate businesses and individuals with seasonal income. Your IP would require a cash flow statement to figure out your earning patterns and determine an affordable monthly sum.
b. Business Credit:
If you need credit to run your business throughout the term of your IVA, a clause explaining your situation can be included in your IVA proposal. Your creditors will discuss it and agree on a set of rules. Normally, most lenders would allow business credit if it is repaid within 30 days.
c. Trade Creditor Exclusion:
A self-employed individual may need to procure goods and services from an unsecured creditor. Including such creditors in an IVA can severely undermine business relationships, which is why a self-employed IVA offers borrowers the option of excluding them from their arrangement and continue making payments to them as before.
2. Joint IVAs
Joint IVAs enable couples to make one payment per household. Under a joint IVA:
- Couples can set up two separate IVAs that are administered as one, once they are approved by creditors
- Joint debts are included in both agreements
- Households make one affordable payment to all creditors
3. Full and Final IVAs
Full and final settlement IVAs allow people to pay a portion of their IVA in the form of a reduced lump sum payment. Full and final IVAs work for borrowers who:
- Want to offer a one-off payment to their creditors to settle their debts
- Have substantial savings and are selling a valuable asset to repay unsecured creditors
- Have family or friends who are willing to provide funds to cover their IVAs in full
Applying for an IVA
Before applying for any debt solution, (including IVA) in the UK, it is important you discuss your situation to make sure you are aware of all your options.
The first step in the application process is to provide details of your finances and assets. An adviser will perform an income and expenditure check to find out how much you can reasonably afford to repay your lenders.
Cancelling an IVA
While it is possible to cancel an IVA, the decision to cancel before the pre-agreed duration ends should not be taken lightly. If you plan on cancelling your IVA, you should first contact your IP and inform them of your reasons. Your IP may be able to offer guidance and help you out. If you do not complete your IVA you could be in a worse position than when you started.
To terminate your IVA, you need to reach out to your IP in writing. Your IP will then send you a notice of cancellation stating that your IVA has failed. Once this happens, you need to:
- Get in touch with all your creditors and negotiate repayment
- Create a repayment schedule for all your creditors because you still owe them the outstanding amount. If your arrangement fails, you will not be able to write off your remaining debt.
- Pay your IP for any services they may have offered thus far
If your IVA is nullified, your creditors or insolvency practitioner can make you go bankrupt. If your creditors file for bankruptcy, they do not need to send you a ‘statutory demand’ beforehand.
Get Debt Help
Money Advisor is committed to providing the best possible service to all those who need help with their finances. If you are struggling to make ends meet or perhaps have experienced a change in circumstances that have affected your ability to manage your finances, please contact us as soon as possible, we will complete a thorough, impartial examination of your individual situation and put you on the road to financial recovery.