Individual Voluntary Arrangements (IVA)
When an individual is experiencing financial difficulties then, depending upon the circumstances, an IVA may be a suitable solution.
An IVA is a contractual agreement with the person's creditors. It is an alternative process to bankruptcy but it is not suitable for everyone.
An IVA may take various forms but typically it will involve an assessment of what money the household has available, excluding payments to unsecured creditors. This money is then paid to an Insolvency Practitioner, usually for 5 years. If the person owns a property then usually this will have to be remortgaged to release equity for the benefit of creditors.
Sometimes an IVA would take the form of a full and final settlement of debts through a sale of a property or from a contribution from a third party such as a family member.
The money received by the Insolvency Practitioner (known as a Supervisor) is used to pay their costs and then to pay off the person's creditors. Provided that the terms of the proposal are adhered to, once the IVA is complete any amounts remaining are legally written off and cannot by law be pursued by the creditors.
As the remaining balance is written off, many IVA companies make claims that they can reduce debts by up to 90%. In practice the minimum distribution to creditors is in excess of 25% but is based upon individual circumstances and the affordability - not an arbitrary percentage.
An IVA is not an easy option and compromises have to be made. It is important that income is maximised and spending is reduced otherwise an IVA is unlikely to be successful. This will mean that for the duration of the IVA, holidays and luxury spending are reduced.
It is important to take advice from a reputable source prior to entering into an IVA to ensure that it is appropriate to the particular circumstances.
An IVA may be suitable if:
The level of unsecured debts are over £15,000 (any less than this then it is not usually cost effective);
The person has regular income - i.e. is employed or self employed;
The person owns a home that they do not want to lose;
The person is willing to make sacrifices in their spending and standard of living;
The person has an occupation that would be severely affected by bankruptcy; e.g. director, professional, police, etc.
The person wants to pay back their debts but cannot afford to do so.
The IVA process was originally set up to assist sole traders and entrepreneurs avoid the stigma of bankruptcy. However the majority of IVAs are in respect of consumer debt. It should be noted that sole trader IVAs are usually more complex than consumer (credit cards, personal loans, etc.) ones and specialist advice should be sought.
IVA myths
It is a free service - IVAs are based upon affordability: the person only pays what can be afforded. There are substantial costs of an IVA which are paid out of the funds contributed to the arrangement. The costs (between £3,000 and £10,000) are approved by creditors and effectively paid out of their funds. Therefore it is not free but does not cost the person more than they can afford.
Its better than bankruptcy - In some circumstances bankruptcy may be a better solution, for example a bankrupt would only be required to make monthly contributions for 3 years and typically at a lower level than in an IVA.
90% of the debts will be written off - In certain circumstances virtually all of the person's debts can be written off but it must offer creditors a better solution than bankruptcy. It is based upon affordability not how much creditors want or the person is willing to pay. In some circumstances creditors are paid in full but over an affordable period or out of other assets.
Possible disadvantages of IVAs
An IVA may provide a good solution to accumulated debt but the underlying cause must have been dealt with (e.g. overspending). Failure to maintain the agreement may result in the person's bankruptcy and this could be after contributing for a long period of time. Therefore an IVA should not be entered into lightly.
Although an IVA may allow a person to keep their property, if there is equity in the property it is likely that this would have to be released through a remortgage in the final year of the IVA. This will increase the monthly mortgage payments after the IVA has been concluded and therefore has long term implications.
Creditors may reject the proposal or require additional terms to be included (e.g. increasing monthly contributions).
Link to booklet "Is a Voluntary Arrangement right for me?"
