You may have heard the phrase “IVA” in a variety of situations but it’s simply an abbreviation for an ‘Individual Voluntary Arrangement’. In this article we take a closer look at what an IVA might entail, together with some of the major pro’s and con’s.
So, what is an IVA?
An IVA is a legally binding agreement which is entered into by a ‘debtor’ (a person who owes money) and aims to ensure that all their outstanding debts are repaid to each creditor within a certain period of time.
As with any other type of arrangement there are both advantages and disadvantages of entering into an IVA and we’ll explore these in a little more detail. In essence, however, an IVA is a form of insolvency yet remains distinctly different from bankruptcy; which can have much more serious consequences.
How do IVA’s work?
In order to enter into an IVA, the debtor must firstly liaise with a suitably qualified person. These are usually either an accountant, insolvency practitioner or lawyer – however, some debt management companies can deal with them too.
Once details of all the debts have been collated and confirmed, the person arranging the IVA will carefully consider how much the debtor can afford to repay on a monthly basis and will then contact all the creditors with this initial proposal. If the creditors holding 75% of the debts agree to it then details will be added onto the Individual Insolvency Register and repayments will commence on a monthly basis via the suitably qualified person or firm.
How long does an IVA stay in place for?
On average, an IVA will last for anywhere between five to six years although this will vary depending on the debtor’s individual circumstances. The debtor’s chosen advisor will be able to give them a much better indication once they’ve sat down and discussed their financial affairs in a bit more detail.
Will an IVA cover all types of debt?
No. Whilst an IVA can be used to pay off many types of debt such as overdrafts, loans, council tax arrears and so on there are certain exceptions. These include student loans, Court fines, child maintenance arrears, mortgage or rent arrears and certain types of car finance.
For anyone looking to seek further advice about entering into an IVA then it’s important to provide as much information as possible to their chosen advisor. Once the advisor has been provided with the required information then they’ll need to carefully consider and categorise what debt types might be evident and advise on how best to deal with them.
What are the key benefits of an IVA?
There are numerous benefits of entering into an IVA:-
- By entering into an IVA, the debtor is given an alternative to bankruptcy. In some cases, a debtor can even apply for an IVA after having been made bankrupt and if this proposal is accepted then the Court can order an annulment of the bankruptcy order. In cases such as these the Official Receiver is usually required to become the supervisor of the arrangement (often referred to as a ‘fast track voluntary arrangement’), although these are only available in certain cases and should never be assumed in terms of acceptance.
- Once an IVA has been entered into, it becomes legally binding and any creditors are no longer allowed to approach the debtor for repayments outside of the arrangement. For most debtors, this is a huge relief in itself since no further communication can be entered into about the debt, nor can any bailiffs be instructed (which, for many debtors, might previously have been the case).
- Throughout the IVA all interest and charges on the debt are frozen and can’t increase thus incurring further debt.
- For many debtors, the biggest advantage of entering into an IVA is that their home will be fully protected. This is a distinct advantage over bankruptcy which can often force an order for sale and leave the debtor without a home or any equity (which may have been accrued over a number of years). The same also applies to certain other assets, such as vehicles.
- At the end of an IVA the debtor will become completely debt free and, in the vast majority of cases, will repay any outstanding debts at a fraction of the cost that they would have done on any other basis.
- Finally, an IVA is relatively easy to apply for – in fact, it can even be done over the phone and with no upfront costs (although these will, of course, be added into any subsequent arrangement).
What are the main disadvantages of an IVA?
- Whilst many debtors don’t see it as a potential problem, all IVA arrangements are listed on the Personal Insolvency Register (https://www.insolvencydirect.bis.gov.uk/eiir/) which means that anyone can check for an IVA arrangement and view the details online. However, on the assumption that the debtor doesn’t publicise the fact that they’ve entered into an IVA then there’s no reason why anyone (such as employers or neighbours) would be mindful to check it.
- As with any other type of debt, an IVA can affect credit scoring and the Personal Insolvency Register is often checked by potential lenders (hence the advice to simply be honest about it before applying for credit). Remember, an IVA can also last for a period of up to five years so it certainly shouldn’t be entered into lightly since credit options might well be limited for a long period of time afterwards.
- Unfortunately the fees for entering into an IVA tend to be quite high since there are two separate fees payable – a ‘nominee’s fee’ and a ‘supervisor’s fee’. For this reason, anyone thinking of entering into an IVA is strongly advised to shop around for the best deals since charges will naturally vary and of course, will be added to the arrangement itself.
Where can I get more advice about IVA’s?
Entering into an IVA is a big decision and certainly shouldn’t be taken lightly. Whilst there are numerous websites available online offering advice about IVA’s you can also contact us for a free and informal chat about what might be the best option for YOU.