Is an Individual Voluntary Arrangement right for You?

By: Nektaria Stamouli
16-Apr-2010

The number of UK bankruptcies and other debt-related issues has reached an all-time high, with financial hardship causing a huge burden for thousands of households during this economic crisis. When things go wrong, there are a number of solutions available to help you deal with your debt.  An Individual Voluntary Arrangement (or IVA) can offer you one potential way out.  We explain the ins and outs of IVAs, to help you decide whether this is the right solution for you.

An IVA is a government debt solution available to residents of England and Wales - a 'trust deed' is the Scottish debt management equivalent, with some minor differences - which enables you to decrease and eventually eliminate your debt. If you owe over 15,000 pounds to three or more creditors and can't afford to meet the payments, an IVA may be the simplest way to leave you completely debt-free.  Typically, the process lasts five years.  An IVA is considered to be an alternative to bankruptcy, and one that is also legally-binding, unlike other debt management plans. One major advantage of an IVA over bankruptcy for homeowners, is that the former is highly unlikely to force you sell your home.

How to make an Individual Voluntary Arrangement work

IVAs are there to help you write off 'non-priority' debts, such as credit cards, overdrafts, unsecured personal loans and store cards. They are not designed to clear 'priority' debts, like mortgages, court fines and Child Support Agency payments.

An IVA is a contractual agreement with the people that you owe money to (your creditors), assuring them that a certain level of debt repayment will be maintained over the life of the agreement. It is a formal repayment proposal presented to your creditors by a licensed professional, called an Insolvency Practitioner. This should enable your creditors to reclaim a greater proportion of your debt than if you had declared yourself bankrupt. It could lower your monthly repayments and freeze the ongoing charges levied on your debt, and once the IVA term has been completed any remaining debt is written off.

How to set up an Individual Voluntary Arrangement

IVAs are legally binding, so they can only be managed by an Insolvency Practitioner.  The Insolvency Practitioner will recommend you this solution only if it's appropriate and crucial for your personal circumstances. The Insolvency Practitioner will evaluate your suitability for an IVA and then will formulate a personal plan according to what you owe and what you can manage to repay each month once your essential monthly living costs have been covered.

The plan will then be submitted to all your creditors seeking repayment. Subsequently, the creditors vote on whether or not to accept your IVA and if the majority of them agree (75% of the non-priority creditors), the plan will proceed. Some companies do charge an administration fee for setting an IVA up whilst others offer the service for free, but you are under no obligations to a company once you have had an initial consultation, so only proceed if you are comfortable with the terms and have everything agreed in writing.

Why to undertake an Individual Voluntary Arrangement

IVAs may not be designed for priority debts, but they can help you stay on top of them, by eventually freeing up your income to make higher repayments towards clearing these. Your Insolvency Practitioner has to figure out how much of your monthly earnings are taken up by your priority debts. The IVA payments will be based on what you can afford after these vital commitments are taken into consideration.

An important distinction between an IVA and bankruptcy is that IVAs are completely confidential. Only you, the Insolvency Practitioner managing your IVA programme, and your existing creditors will know about your agreement. This means that you won't have any problem keeping your job secure, protecting your home, and maintaining your reputation. The only exception to this is if you do apply for credit, where you are required to reveal your IVA status.  As a rule, you'll not be able to borrow money during this period, although there are exceptions in certain circumstances.

It is remarkably rare to not to be able to repay debt through an IVA as long as you keep to the programme, because you would know from the beginning exactly what are signing up to. When the programme has started, your lenders will be unable to take any legal action against you and even if they have already started, once the IVA starts and they have agreed to it, they are legally required to cease proceedings.  In addition to avoiding being hassled by creditors, you would also have the peace of mind of one lump sum leaving your account each month, rather than having to juggle multiple repayments and payment deadlines.

When Individual Voluntary Arrangements are not suitable

There are some cases where going bankrupt could be better than signing up to an IVA solution. For example, if you don't own a house and have nothing to lose by declaring yourself bankrupt, then an IVA solution may not be suitable. It is worth noting that people tend to be discharged from bankruptcy in one year, while most IVAs last for 5 years.

You should bear in mind that the typical repayment plan for an IVA is five years, but the fact that you have undertaken this debt solution can make obtaining credit more difficult and expensive for the sixth year as well. The reason for this is that an IVA will stay on your credit report for six years from the start of the arrangement.  Also, you may be requested to sacrifice any increase in income received - such as salary rises and bonuses - while the programme is running, so that this additional income can be used to pay off your debts.

Furthermore, an IVA is only suitable for those who are able to make regular payments for the full duration of the programme. IVAs require a minimum level of 'disposable' income to ensure you can make your monthly contributions, which is usually around 150-200 pounds a month. So if your income is unsteady you should consider other solutions.

An IVA is by no means a quick or easy fix, but it does provide a medium-term solution that will give you peace of mind and enable you to get rid of your debt in five years time or even less.  Wherever in the UK you live, you can request a confidential call from a debt specialist by filling out our short debt form.