If you are struggling with debt, the best way to deal with your financial circumstances is to act now – or your debt problem could get worse.
An Individual Voluntary Arrangement (IVA) is one way to help you get out of debt and pay back the creditors to whom you owe money.
We often get asked questions about what is an IVA, how an IVA works, or more importantly is an IVA is the right debt solution for you.
Instead of sifting through the search engines to find your answers, we have compiled a detailed help guide to ensure you have all your IVA questions answered right here.
IVA meaning
IVA stands for Individual Voluntary Agreement. An IVA is a legally binding agreement between you and all your creditors to pay back the debts you owe over a given time.
This means when creditors agree to the terms of an IVA, they cannot take you to court or contact you during your arrangement.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is one way to pay back debts that you are struggling with.
IVAs are formal agreements that help borrowers pay off their unsecured debts at an affordable rate over a set period.
IVAs were initially introduced by the Parliament as an alternative to bankruptcy in England and Wales as part of the Insolvency Act 1986, and IVAs have now become a very popular debt solution for people struggling with debt in the UK.
In a recent interview with Bill Burch, a qualified Insolvency practitioner with over 20 years of experience, he mentioned that IVAs have evolved significantly over the past decade, offering more flexibility and options for debtors.
According to the UK Insolvency Service’s 2022 report, IVAs have seen a 10% increase in uptake, reflecting their growing popularity as a debt solution.
Is an IVA Right for Me?
As per the guidelines provided by the UK Insolvency Service, the following are the key eligibility criteria for an Individual Voluntary Arrangement (IVA):
- You must be able to show you cannot reasonably afford the contractual payments.
- You must owe money to more than 2 creditors.
- You must have unsecured debts amounting to a minimum debt level of £5000.
- You must have a stable source of income (such as employment, benefits, or personal pension) that allows you to make monthly payments regularly
An IVA is a formal debt solution and the decision to enter it should be given serious consideration due to the impact it has.
That is why you should discuss your situation with a professional IVA company before taking any steps and understand the reality and myths surrounding IVAs.
A debt expert can explain this and other debt solutions to you so you can decide what is the best debt solution for you.
If you think an IVA is the best debt solution for you then speak to an advisor.
When an IVA might not be right for you
IVAs involve paying an agreed affordable amount monthly to your creditors for many years.
You will pay the amount you can afford every month towards your debt. You will be able to work this figure out with your licensed Insolvency Practitioner.
You can get a head start when working out your affordable monthly payment by downloading our budget planner and working out your monthly expenditure against your income.
However, if you do not have a permanent job or fixed income, an IVA may not be the best option for you.
Instead, you will need to look at other debt solutions available such as a debt relief order, which would be a more feasible option to help with your debt problems.
What debts can be included in an IVA?
Most unsecured debts, meaning debts that are not tied to an asset, such as your home, can be included in an IVA. Unsecured debt includes the following:
- Catalogue and store card debts
- Credit cards
- Personal loans
- Overdrafts
- Gas, electricity, and water bill arrears
- Council tax arrears
- Income tax / National Insurance arrears
- Tax credit/benefit overpayments
- Payday loans
- Debts to family and friends
- Other outstanding bills
- Joint debts – though the other person must also continue their payments
What debts can’t be included in an IVA?
Secured debts that can’t be included in an IVA are:
- Mortgages
- Other secured loans
- Hire purchase agreements
- Debts incurred through fraud
- Court fines
- TV licence arrears
- Student loans
- Child support arrears
- Social fund loans
How does an IVA affect your life?
Like with any important financial decision, an Individual Voluntary Arrangement (IVA) can affect your career, home or even credit score. So, let’s delve into more detail regarding these:
An IVA could affect your current job or career
From our years as debt solution advisors, we’ve seen firsthand how an IVA can impact one’s career. While many professions remain unaffected, certain sectors, based on our interactions with clients, have specific regulations concerning IVAs.
If your job falls into the following categories:
- police,
- fire service,
- prison service,
- banking clerk
- an accountant
- solicitor
- self-employed – if you continue to operate your business then ongoing credit may be an issue with certain suppliers.
An IVA could affect your house and ‘available equity’
If you own a property, then your Insolvency Practitioner will investigate this for you when applying for an Individual Voluntary Arrangement (IVA).
Consideration will be made regarding how much equity is available to sell your house and repay your debt/debts.
Generally, all properties you own are included in an IVA, however, it is important to be clear that you will never be made to sell your house as part of your Individual Voluntary Arrangement (IVA).
Instead, what could occur is that you may be asked to release some equity from your property, which is also known as ‘available equity’.
So this is the Maths bit…
Available equity in your property will be calculated, by taking the value of your property and discounting it to 85%.
Then, deducting any mortgage and borrowing secured on it. This will give you your ‘available equity’ figure. So here is how it affects your IVA:
- If the ‘available equity’ is less than £5,000 (at the outset of your IVA), you won’t need any further review and your IVA will last for 60 months.
- If the ‘available equity’ is more than £5,000 (at the outset of your IVA) BUT you have less than £100 of disposable income left each month OR you are over 60 years old, then your arrangement will last 72 months without review of your equity.
- If the available equity is more than £5,000 (at the outset of your IVA), you are under the age of 60 and have more than £100 of disposable income each month, your arrangement will last for 72 months but will be reviewed again at 54 months.
What happens at month 54 of the equity release clause?
At month 54, further valuation will be undertaken and a more up-to-date mortgage balance will be requested to see how much equity is available on your property based on the 85% limit.
During this period, you will be asked to re-mortgage your house and introduce all or part of the available equity.
However, there are a few clauses.
The monthly payment for any further borrowing can’t be more than 50% of your IVA contributions and the length of the loan can’t go above the end of any existing mortgage or your state retirement age.
So what happens if I fall into the criteria and can release equity?
If you can release equity under the equity release clause then your IVA will end when that money is received to pay off your debts.
If you can’t get a release of your equity for various reasons, then your IVA will continue for 72 months.
An IVA could be bad for my credit rating
During our tenure in the financial sector, we’ve observed the repercussions of an IVA on credit ratings. An IVA, as per the credit bureau guidelines I’ve studied, remains on your credit file for 6 years from its commencement, regardless of early completion.
An IVA negatively affects and causes problems to your credit score because it shows creditors that you have struggled at repaying your debts in the past.
How will an IVA affect my credit rating?
If you have an Individual Voluntary Agreement this can be recorded in your credit report.
Your credit scores dropped because this number was derived from information in your reports.
An IVA shows potential creditors that you have experienced difficult debt obligations in the past so they may view you as a high-risk customer.
Low credit scores will mean you might struggle to borrow money.
The Experian credit score can be verified anytime through a Free Experian account.
There are ways to improve your credit rating. Find out more here.
How do I remove an IVA from my credit report?
When you have repaid your debts, an IVA should automatically be marked as complete and eliminated without you doing that.
However, if you think that the records of the credit reference agency are inaccurate, you will need to take action to change them.
You can ask the lenders or creditors to add notes indicating your reasons for starting an IVA or other forms of deferred payments – for example through unrelenting employment or long-term illness. A certificate of insolvency will require a letter from a registered bankruptcy attorney.
How Much Does an IVA Cost?
There is no surprise that there are charges associated with an IVA.
There are costs involved in setting up an IVA and any fees for the ongoing management of the IVA are explained in the agreement.
All IVA-related costs are deducted from the total sum you pay to your creditors every month under an active agreement.
There are three main costs associated with an IVA: nominee’s fees, supervisor’s fees, and disbursements.
Let’s look at each of them in detail:
Nominee’s Fees
Paid to your IP for their services. Nominee’s fees usually amount to £1000 (this is subject to change)
Supervisor’s Fees
The supervisor’s fees cover the expenses involved in implementing your IVA. The fees range between 15 – 20% of payments you make under your IVA, but some IPs prefer charging a flat rate.
Disbursements
These cover the amount your IP may have to pay to third parties for software licenses and insurance. Disbursements vary from case to case, but they total up to £1,200 on average.
How to manage your IVA
Once your IVA has been set up (find out more about how an IVA is set up here), an IVA is a legal agreement so it is important to know how an IVA works, how your Insolvency practitioner will manage it and what role you need to play.
The Role of the Insolvency Practitioner
When you are looking to take out an IVA, your IP, which will be registered by the Insolvency Practitioners Association, will be carrying out various tasks on your behalf to deal with your creditors directly. These include:
- Setting up your IVA
- Managing your monthly IVA payments
- Sharing those IVA payments amongst your creditors
Keeping your IP up to date is paramount to the agreement terms as it is legally binding.
For example, if you receive a lump sum of money during the time of your IVA then you will have to inform your qualified practitioners, who will then review your arrangement and make changes accordingly. Find out more about what could happen if you decide to hide money from IVA.
Your role during the IVA
- You might assume that your Insolvency Practitioner will be managing your IVA account, but you also have a responsibility. You will need to ensure you do the following:
- Stick to your repayment plan – You need to try and ensure you make your monthly repayments on time. If you fall behind or miss a payment, then you could be jeopardising your agreement.
- Tell your IP if your financial circumstances change – When you take out an IVA, you will generally have an annual review. If you haven’t done so already, it is time for you to declare if your financial circumstances change. You will need to provide the necessary documentation so your Insolvency practitioner can review your case again.
How to cancel your IVA
Sometimes your financial situation may change for the better or worse.
If you are in an IVA, then it could be possible for you to cancel your IVA before it ends.
There are two options:
Option 1 – Write to or email your IP and ask to cancel your IVA. They might agree to cancellation if:
- your circumstances mean it’s unlikely you’ll be able to pay any more money towards your debt
- you can show the creditors you’re able to repay more money without the IVA
If they agree to the cancellation, your insolvency practitioner will fail the IVA – this means the IVA hasn’t worked and will end.
Option 2 – If they don’t agree to the cancellation, you could stop making debt payments.
This will breach the terms and conditions of the IVA and cause what is called a failed IVA. It could take weeks or months – depending on how quickly your IP takes action to fail the IVA after the missed payments.
What happens after your IVA fails
Your IP will send you a notice of termination.
You’ll still have to:
- make arrangements with your creditors to sort out your leftover debt/debts
- pay your IP fees – if you haven’t already
- Act quickly to sort out your remaining debt – your creditors might start charging interest on your debt/debts and you could be made bankrupt by the IP or your creditors.
What next?
There are plenty of debt solutions available to struggling borrowers in the UK and going over them with a professional debt management company can give you a chance to regain financial control.
That way, you can leave your money-related problems in the past and begin a fresh chapter in your life.
At Money Advisor, we offer debt advice and assistance to hundreds of UK-based borrowers.
