Guide to Individual Voluntary Arrangements (IVAs)
It is essentially a repayment plan, which allows you to make reduced payments to pay off an agreed percentage (usually up to 75%) of your total debt. If the agreed repayments are made, the debt tends to be settled within five years.
Because an IVA is a formal arrangement, it has to be set up by a licensed Insolvency Practitioner (IP). IVAs provide an alternative to filing for bankruptcy.
Individual Voluntary Arrangements and bankruptcy
An IVA is seen as preferable to being made bankrupt because the debtor can retain their tools of trade and, in the case of a professional person, continue to practice, or hold company directorships. IVAs can be set up for either a person or a company.
An IP petitions the high court for protection for a borrower/debtor under an IVA. A proposal for repayment is put to the creditor, who must agree. If there is more than one creditor, 75% of them must accept the terms. If all parties are in agreement, the arrangement becomes binding upon the debtor and all creditors named in the agreement.
If the debtor fails to make the repayments stated in the IVA, the IP is likely to petition for the individual to be made bankrupt. While bankruptcy normally lasts for only three years, some creditors insist that IVAs last for a longer period of time.
How do Individual Voluntary Arrangements work?
Firstly, your creditor(s), the companies or individuals you owe money to, must agree to the IVA. The IP will then assess your financial situation and propose an affordable monthly payment. You must make this every month over the next five years. The level of payment deemed affordable will be based on your income minus your outgoings.
Some IPs will also provide help and support with budgeting, so that you do not get into trouble with your finances again. The IP will also review your financial situation regularly over the course of the next five years. If you keep up the payments, at the end of the five-year term, an interim court order will be granted, guaranteeing that none of the creditors can pursue you for any more money.
How do Individual Voluntary Arrangements affect mortgages?
If you have a fair amount of equity in your property (to work this out, subtract the amount you owe to your mortgage lender from the current value of your home, the result is the equity), you may be expected to release some of it to pay the creditor.
This may sound drastic, but if the creditor is a mortgage lender, it can be the best way for you to avoid having your home repossessed and get back on an even keel when it comes to your finances.
If you have an endowment policy attached to your mortgage, you may also be expected to cash it in and use the money to pay your creditors.
Individual Voluntary Arrangements: the basics
- IVAs are unlikely to be granted for any longer than five years. A percentage of the debt will usually be written off.
- Once an IVA is agreed, your creditors have to stop adding interest and late payment charges.
- Your creditors can not break the agreement at any time and are bound by the terms agreed.
- It is important that consumers do not confuse IVAs with Debt Management Plans, which are not legally binding
- IVA creditors cannot chase debtors for debts.