What is an IVA? - Individual Voluntary Arrangement - IVA UK

Individual Voluntary Agreement

An IVA is an agreement between you and your 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 as much as 90% 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 agents will run you through the whole process before you commit to an arrangement.

What is an IVA?

An individual voluntary arrangement (IVA) is a legal agreement, between you and your creditors, that agrees a monthly repayment plan over a period that condenses multiple debts into one monthly payment.

Since it is a formal and legal debt solution, both you and your creditors are obliged to stick to it.

An IVA is usually 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 need a majority of 75% of your voting creditors by debt value to approve your IVA offer for all your creditors to be bound.

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?

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.

Our debt experts begin the IVA process by checking your income, expenses, and debt level.  We then work with you to check out all your options and confirm if an IVA would work best in your specific situation.

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 creditors 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 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.

If you maintain payments throughout your IVA, any amount still owing to the included creditors will be written off at the end of your payment term and you will become debt-free.

*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 as much as 90% 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. They enable people to become debt-free within five years.

Below is an example that shows how our experts helped a client write off a major portion of their debt:

Individual Voluntary Arrangement

Debts Included in an IVA

An IVA would cover most of your unsecured debts. Debts covered by IVA include:

  • Overdrafts
  • Personal loans and catalogue debts
  • Council Tax arrears
  • Hire purchase debts where the vehicle has been repossessed
  • Credit and store cards
  • Arrears owing to HMRC such as income tax and national insurance
  • Gas, electricity, and water bill arrears
  • Benefit and tax credit overpayments (unless fraudulent)
  • Payday loans
  • Joint debts, but the other person must continue to make payments

Debts Not Included in an IVA

An IVA does not cover most secured loans. Debts not covered by an IVA include:

  • Mortgages
  • 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

Secured Debts Vs Unsecured Debts

Most financing methods in the UK including loans and other forms of credit fall into two broad categories: secured debts and unsecured debts. Understanding the main difference between secured and unsecured is vital if you want to determine whether an IVA is the right option for you.

A secured debt is backed by a piece of collateral, which can be any asset like a car or home. The collateral serves as a form of surety for the debt. If a borrower with secured loans is unable to repay their debt according to the set terms, the lender can acquire ownership of the collateral.

Most borrowers find it easier to get secured credit because they involve less risk for the lenders. Secured loans are a financing option for people who are rebuilding credit or those with bad credit history. They may also come with lower interest rates.

However, taking out a secured loan is a big decision that needs to be carefully considered, especially if you have been having financial difficulties. Some common examples of secured debts include mortgages and car loans. In the event of a default, the property (house/car) of a borrower can be seized by the lender, who can then resell it to make up for the unpaid amount.

An unsecured debt is not backed by any assets or collaterals. If a borrower is not able to repay an unsecured debt, their property is safe in most cases. A lender cannot automatically seize their assets if they default.

Because unsecured credit does not come with a tangible surety, they are riskier for lenders. That is why unsecured debts have stricter selection criteria and higher interest rates compared to secured debts.

Borrowers are selected based on different factors like their credit rating and earning to debt ratio. Examples of unsecured debts include personal loans, credit cards, medical bills, and some forms of retail contracts such as mobile phone contracts.

Personal and Household Debt Breakdown

According to the Office for National Statistics, unsecured debts are rising in the UK. An ONS study that tracked average household debt from April 2016 to March 2018 indicated that the debt had risen by 9% to £9,400 within two years.

A pre-COVID forecast made by Office for Budget Responsibility in March 2020 predicated that total household debt of all types would increase from £2.068 trillion in 2019 to 2020 to £2.425 trillion in 2023-2024.  The numbers are expected to rise in the context of the economic setback caused by the pandemic.

A breakdown of unsecured debts released by ONS shows that debts without mortgage such as personal loans, student loans and hire purchase agreements make up most of the household debt. Other debts such as credit card loans, overdrafts, and bill arrears also contribute significantly to debt.

It is worth noting that an individual voluntary arrangement can cover all the unsecured loans shown in the breakdown except for student loans:

Individual Voluntary Arrangement

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.

Individual Voluntary Arrangement

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 2 or more lines of credit
  • 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:

  • 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.

  • Supervisor’s Fee

A supervisor’s fee usually ranges between 15 to 20% of payments made under an IVA but in some cases, IP’s 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 advice, managing creditor relations as well as undertaking annual reviews.

  • Disbursements

Disbursements may vary from case to 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?

Once your IVA is over, the rest of your unpaid debts are written off. As long as you have complied with your proposal terms, your creditors cannot take further action against you. You can write off up to 90% of your debts by setting up an IVA.

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.

Career:

In most cases, an IVA will not impact your job. The main exceptions 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, 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.

Home:

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 attempt to remortgage your property and include 85% of your equity in your IVA.

It is worth noting that you will not be required to sell your home to repay your debts. If you fail to remortgage your property, your IVA will simply be extended for 12 months.

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 you show a willingness to improve your credit score and show creditors that you are a reliable candidate.

Setting up an IVA is the first step towards assuming financial responsibility and managing your debts more practically.

Possessions

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
  • Clothing
  • Books
  • 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:

  • Shares
  • Endowments
  • Insurance policies
  • Investments
  • Windfalls
  • ISAs

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 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 fulfill 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
  • 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

Your individual circumstances may mean there is some difference in how your IVA could be proposed. This is so it can take into consideration a range of factors such as your debt level and profession including:

  • 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:

  • Self-Employed

IVAs set up for self-employed borrowers work the same way as IVAs for employed people – except there are a few key differences:

  1. 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.

  1. 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.

  1. 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.

 

  • 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

 

  • 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 with a debt expert 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.

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.

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Frequently Asked Questions (FAQs)

What does IVA stand for?

IVA is short for Individual Voluntary Arrangement.

 

Will setting up an IVA keep me from getting credit?

An IVA may make it harder for you to obtain credit. You will need written permission from your IP if you want to apply for credit. An IVA also affects your credit score.

 

Are IVAs Recorded Publicly?

While the details of your IVA will not be disclosed, your IVA will be added to the Individual Insolvency Register, which is a public register. It will be removed 3 months after your IVA finishes.

 

What is the IVA register?

The IVA register is a part of the Individual Insolvency Register, a public register that records different types of insolvencies like IVAs, DROs, and bankruptcies.

 

Can I repay my IVA early?

Yes. If you have a lump sum amount that could repay your debt in full, you can make a one-off payment and settle your debts early.

 

When are interest and other charges on my debt frozen?

Interest as well as all other charges on your debt will be frozen once your IVA is approved.

 

How badly would an IVA affect my credit rating?

Setting up an IVA will negatively affect your credit rating but not forever. An IVA will show on your credit file for six years before it is removed – but it’s worth noting that this is the case for most debt solutions and being in debt also affects the credit score.

 

Will my IVA damage my partner’s credit rating?

Your creditors cannot mark your partner’s file for your financial activities so your partner’s credit rating would remain unaffected. Any joint debts included in an IVA only deal with your liability. Your partner is usually liable for the full debt separately themselves. We can discuss this with you in more detail and explain the options if this is the case

 

Can someone else pay my IVA?

Nobody is responsible for your IVA but you. However, if third parties want to pay for it out of their own accord, they can.

 

What can I do if I missed an IVA repayment?

If you miss a payment, you should contact your IP as soon as possible, explain why you were unable to make the payment, and ask if you can make a late payment. If your circumstances have changed, you should inform your IP: they may be able to renegotiate the terms of your IVA and make it even more affordable.

If you do not reach out to your IP, your IVA could be terminated. Your creditors or IP can also approach the court to file a bankruptcy order against you.

 

Who can go for an IVA?

An IVA can be set up by all UK residents in England, Wales and Northern Ireland. They can be:

  • Single individuals
  • Couples
  • Business owners
  • Homeowners
  • Tenants

 

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