Struggling with high debts? If you owe £10,000 or more to your creditors and have been lagging on your repayment schedule, an IVA might be the right formal debt solution for you.
But how do you know if IVA would work for you? In order to make an informed decision about your financial situation, it’s important that you develop a basic understanding of IVAs – and then explore your options with a debt expert or an insolvency practitioner.
Read our comprehensive guide to IVAs to find out what an IVA is, how it works and whether it’s the best insolvency option for you.
What is an Individual Voluntary Arrangement (IVA)?
An individual voluntary arrangement (IVA) is an insolvency option that allows debtors and creditors to reach a legal consensus about the total debt owed and the payback terms that apply to it. An IVA is, therefore, a legally binding agreement between you and your creditors to repay the debt at a more affordable rate over an agreed period of time (usually 5-6 years).
Individual voluntary arrangements, initially introduced in the UK to facilitate insolvent businesses, soon emerged as a popular debt solution for individual borrowers who owed large sums of money.
IVAs offer an alternative to bankruptcy and allows borrowers to repay their outstanding debts in the form of fixed monthly payments. Most borrowers who qualify for an IVA can write off anywhere between 25-90% of their total debt.
How Does an IVA Work?
Individual voluntary arrangements work by freezing your interest rate and charges so you can pay off your debt in the form of fixed monthly instalments over a set time span. An IVA can only be set up by an Insolvency Practitioner (IP). They will help you with the entire process from the start. It’s their job to guide you throughout your IVA, negotiate an affordable repayment scheme, mediate with your creditors and handle your IVA proposal submission.
Once a workable proposal is drafted by your IP, they get in touch with your creditors and pitch your terms to them. If 75% of your voting creditors agree with the proposed conditions, and you formally enter an IVA, any money you owe after your IVA is completed is legally written off.
IVA Pros & Cons
Like all debt solutions, IVAs have their own list of pros and cons. Legally binding debt solutions such as IVAs can have significant financial implications on your life. That’s why we recommend that you seek the help of a professional debt advisor to help you weigh out the benefits of an IVA against the risks.
Here are some of the pros of an individual voluntary arrangement:
• There are no upfront fees involved in setting up an IVA
• An IVA is legally binding and that means once an IVA is in effect, your creditors can’t chase you for money.
• An IVA lasts for a fixed duration, all your remaining debts are written off upon completion.
• If you stick to your repayment schedule, interest and other charges are frozen.
• An IP can help you draft a proposal according to your personal and household spending.
• You only have to make a single convenient payment to your creditors.
There are also some costs and risks associated with IVAs. Here are some of the cons of IVAs:
• You may have to conform to spending restrictions.
• Not all debts can be included in your IVA. Student loans, child support & maintenance, magistrate court fees, and social fund loans are some of the loans not covered by IVAs.
• Creditors may choose to reject your IVA proposal.
• Inability to stick to the new repayment schedule can result in your IVA failing and your creditors could petition for your Bankruptcy.
• IVAs are recorded in the Public Insolvency Register.
• An IVA would show on your credit file and affect your credit rating for 6 years.
Is IVA the Right Debt Solution for You?
Individual voluntary arrangements have helped hundreds of UK-based business and individuals deal with their financial issues and become debt-free. They have the overall advantage of being convenient, flexible and legally binding.
Still, the decision to opt for a legally backed debt solution should not be taken lightly. IVAs are not a standard ready-made solution for all debt issues. They only work for individuals with specific needs and circumstances.
IVAs might be the best option for you if:
Your debts sum up to £10,000 or more. You can still look at an IVA for smaller debts but since the fees are high, we recommend you set up an IVA only for high debts.
• You owe money to at least 2 different people.
• You feel like you are struggling to speak to your creditors and would benefit from a dedicated team to speak to them on your behalf.
• You can afford to make regular IVA payments on a monthly basis.
IVAs might not work out so well for you if:
• Your debts are less than £10,000.
• You don’t have a fixed source of income or a permanent job and you can’t afford to make regular monthly payments.
• You work in a financial, legal or accountancy firm (check your contract).
• You took out support for mortgage interest (SMI).
• You can’t give any spare income or a lump sum to your creditors.
IVA Costs & Risks
Before you commit to any long-term debt solution, it’s important to pause and factor in the costs and risks associated with it. That’s why we recommend you consult a professional debt expert before you begin planning for an IVA.
Here are some of the ways an IVA can affect you:
Even though you don’t have to pay upfront charges, an IVA can only be set up by a licensed insolvency practitioner who will take fees from any payments you make for the setting up and ongoing management of the IVA. These costs are subject to approval by creditors and are taken from the monthly payments you make.
If you’re a homeowner, you might be expected to re-mortgage your house nearing the end of your IVA term if you have equity. If you cannot re-mortgage your house, you may have to pay into your IVA for 1 additional year.
3) Belongings, Pension & Savings
If you’re in an IVA, you may have to sell your valuables and assets (e.g your car) or use any savings to repay your creditors. If you experience a windfall (receive any unexpected money e.g inheritance), you can keep £500 but may be expected to pay the rest into your IVA. Your personal pension also counts as your income so your creditors may also be entitled to it.
4) Ease of Getting Credit
Setting up an IVA will inevitably affect your credit rating, so obtaining credit might get harder for you.
Alternatives to an IVA
Many debt repayment schemes and solutions are available for struggling debtors based in the UK. Make sure you check if there are any better, cost-effective and sustainable ways to manage your debt. Our debt experts recommend you also look into:
Debt Relief Orders
Debt relief orders are an option for low-income borrowers who owe £20,000 or less, don’t own a home and have minimal assets.
Debt Management Plans
Debt management plans may work as an effective debt solution for borrowers who can afford to pay some of their spare income to their creditors on a monthly basis.
Bankruptcy is another insolvency option mainly suited to people whose circumstances are unlikely to change and who will struggle repaying debts in a reasonable time.
Get IVA help from An Expert
Going for an IVA is a big decision that you should make only after weighing out all your options and making sure that you have exhausted other options. The debt solution you pick should be well-suited to your debt amount and individual circumstances – that’s exactly why we recommend you get IVA help from an expert.
Money Advisor is committed to providing the best service, guidance and resources to UK-based borrowers. If you’re struggling to repay your debts or you need some information about IVA, feel free to reach out to our friendly and impartial debt specialists. Our money advisors and experts will assess your situation, help you pick the best debt solution and put you on the road to swift financial recovery.