What is an IVA?
An IVA - Individual Voluntary Arrangement is an agreement between you and your creditors which helps you payback as much of your debt as you can through affordable monthly payments. IVA is a legally binding agreement between you and your creditors. The arrangement will normally last 5 years and during this period you will be expected to pay what you can afford outside reasonable living costs. IVA has to be set up by a licensed professional called an Insolvency Practioner (IP). All unsecured debts must be declared into an IVA.
Individual Voluntary Arrangement - IVA is not available to those who live in Scotland; the equivalent solution in Scotland is called a Protected Trust Deed. Most insolvency practitioners can also advise on or provide advice on Trust Deeds.
What is the Purpose of an IVA?
Individual Voluntary Arrangement - IVA helps those in financial difficulties to make a formal proposal to settle their unsecured debt within a reasonable timeframe. All interest and charges will be frozen to 0% and creditors will be prohibited from demanding additional payments.
Individual Voluntary Arrangement - IVA is also a good mechanism for creditors to get as much of the debt back without incurring costs in pursuing the debtor, which may end up fruitless. IVA will always provide a better return to creditors than bankruptcy which is favourable to both debtor and creditors alike.
How are the IVA monthly payments calculated?
Monthly payments are based on what you can afford - this payment will be pre calculated before any agreement takes place and can vary during the 5 years depending on any fluctuations with your income and expenditure. It would be reviewed by the insolvency practitioner every year accounting for increases not only in income but also expenditures. In many cases the monthly payment remains the same each year, but it is important to understand that you must pay as much as you can reasonably afford, which may increase during the IVA. After all the creditors are agreeing to write off any outstanding debt at the end of the IVA.
Once the final payment is made, any outstanding debt is legally written off. The arrangement can write off a significant portion of your unsecured debt - in many cases more than 70%. Homeowners may be required to release equity at the end of the 5 years, however, your home is never at risk. If it is not possible to do an equity release towards the end of the IVA, then creditors will often agree to an extra year of payments instead making the IVA last 6 years in total.
How does Individual Voluntary Arrangement - IVA work?
Once a decision has been made that an IVA is right for you (always seek professional advice from a reputable debt consultant) you will be required to undertake an assessment regarding your current financial situation. Based on the information you have given, a repayment amount will be calculated. For an IVA to be approved, creditors will be called upon to vote either for or against the arrangement.
Provided that creditors representing 75% or more of the debt agree then any remaining creditors will be bound by its terms anyway.
It will then be legally binding. As long as you keep up the repayments, when the term of your agreement is finished, you will be free from these debts regardless of how much has been paid off.
During the period of your arrangement your financial situation will be reviewed annually to see if there has been any change in your circumstances.
Once the IVA is accepted the IP's role becomes that of supervisor, monitoring the it's progress and ensuring that the terms and conditions that were agreed to at the creditors meeting are properly adhered to. The IP has a duty to both the debtor and the creditor, so provided that you are open and honest within the process and accept that you will pay as much as you can, then it should be successful. In the same way that the IP will ensure the payments are affordable to you, they will also ensure that the creditors get as much of their debt back as is reasonably possible.
It is your responsibility to pay the agreed payments to the IP who will then ensure that these payments are distributed to all creditors on a pro-rata basis until the successful completion of the IVA. It is in the debtors own interest to maintain their payments as failure to pay will almost certainly result in the failure of the IVA, which could lead to bankruptcy.
Upon the successful completion you will be considered debt free. Any outstanding balances are written off..
It is worth noting that if you do enter into an IVA with your creditors and you have an endowment policy linked to your mortgage then you may be expected to cash it in and pay the proceeds into the arrangement. Likewise, if your property has a reasonable amount of equity then it is likely that some of it will have to be released during the arrangement (usually at the end) so it can be paid to the creditors. Drastic as this may sound it can be a deciding factor in whether an IVA is approved by creditors and a realistic way in which you can retain your property.
What Are the Differences between a DMP and an IVA?
- Although a DMP may greatly reduce your repayments each month, you will still have to pay all of your debt back. This could take a very long time. Example: A debt of £20,000 with reduced monthly repayments of £200 a month will leave you repaying your debt for at least 9 years, and that is if the creditors freeze all the interest and charges which they do not have to do.
- In an IVA interest and charges are stopped as part of the legally binding agreement. In a DMP your creditors do not have to stop adding interest and late payment charges, though some will agree to this and review it periodically. If the creditors do not freeze interest or add charges then the reduced amount paid each month may only just cover the extra interest being added. If this is the case, then the debt will never be repaid.
- In a DMP, your creditors can break the agreement at any time and ask for increased payments or add further interest. In an IVA the creditors cannot do this, provided you meet the payments and requirements as set out in the IVA agreement.
Why use an IVA?
- Affordable payments: You have an agreement with your creditors to make a single reduced payment each month.
- Realistic timeframe: Individual Voluntary Arrangement - IVA lasts for a sensible period of time (normally 5 years).
- Protection: Creditors will not take further action through the courts and your home is secure. Creditors are not allowed to add further interest or charges to your accounts by law. The agreement is fixed, meaning that creditors cannot randomly demand changes to it.
- Fair: Both you and your creditors get the best possible outcome.
- Supervision: Individual Voluntary Arrangement - IVA is managed by by an independent professional (the insolvency practitioner) and you do not have to deal with your creditors directly.