What is an Individual Voluntary Arrangement (IVA) and how do they work?

An IVA is a legally binding agreement between a debtor and their unsecured creditors to pay their debts back over a period of time. The aim is for an agreement to be reached whereby the debtor makes affordable monthly payments or a one-off lump sum payment to their creditors. IVAs were originally intended for people running a business (sole traders), but over the years more and more people with personal loans and credit cards who have run into difficulty have been entering into IVAs.

Most IVAs last for five years and the monthly payments are based on your disposable income; an amount you can realistically afford after essential household and personal expenditure. In some circumstances where the individual can raise money against a house or from a third party, then it can sometimes be worthwhile exploring the feasibility of proposing a one of payment IVA in lieu of monthly payments.

The debtor needs to present a proposal to their creditors outlining the problems they have encountered and the causes of their insolvency. Within the proposal, details of all assets and liabilities need to be disclosed as does an income and expenditure analysis.

The key element of the proposal is the offer to the creditors. Each creditor gets a chance to vote, either accepting or rejecting the proposal. The bigger the proportion of your debts a creditor owns, the more weight their vote will carry. For an IVA proposal to be approved, 75% of creditors who vote (in relation to the amount of debt not the number of creditors) need to be in favour.

Once approved, it is vitally important the individual sticks to the terms of the arrangement otherwise the arrangement will fail. In most instances where this happens, the individual will end up bankrupt. If it is successfully completed, a proportion of the debt will be written off, typically over 50%, however sometimes, depending on circumstances the debt is repaid in full.

• Creditors who vote against your proposal are still bound by it if it is accepted
• Creditors whose lending is unsecured can’t take any further action
• Interest and charges are frozen as long as you keep up your payments
• An advice agency (like us) or the insolvency practitioner can help you prepare your proposal, including agreeing on the level of your household and personal expenditure based on guidelines acceptable to creditors
• Most insolvency practitioners will allow you to pay their fees for preparing your proposal monthly as part of the IVA
• Unless it is a lump sum payment IVA, you make only a single payment each month. The insolvency practitioner is responsible for administering and distributing your payments to creditors
• The terms of an IVA will usually enable you, your spouse, partner or a relative to make arrangements to buy your share of the net worth (value minus secured debts) of your home or to make extra payments, rather than the home having to be sold.
• On completion of the IVA, the balance of what you owe your creditors is written off
• If you have a viable business, you will be able to continue running the business.

• Your IVA is entered on a public register
• Your creditors may not approve the IVA
• Only unsecured debts included within the IVA may be discharged at the end of the period and unsecured debts not included will remain outstanding
• If there is some equity (value) in your home after taking account of the mortgage(s) or charges secured against it, you will probably have to release your share, usually in the fifth year of your IVA, by remortgaging the property. If you can’t get a remortgage, you may have to continue making monthly payments from your income, for up to another year
• There will be restrictions on your expenditure. Only essential household and personal expenses will be approved by your creditor
• If your circumstances change, and your practitioner can’t get creditors to accept varied terms, the IVA is likely to fail. You will then still owe your creditors the full amount of what you owed them at the start, less whatever has been paid to them under your IVA
• If your IVA fails, you may be made bankrupt
• Entering into an IVA will remain on your credit files for 6 years, and it is unlikely that you will be able to obtain credit during that period

An IVA is a serious commitment and one that shouldn’t be entered into lightly. They are most suited for people who have trapped equity in their homes, people whose jobs stipulate they can’t go bankrupt or for people who are operating reasonably sized businesses as sole traders.

If you don’t fall into any of the above categories, then there may well be a better alternative available to you, such as bankruptcy (even if you own your own home) or a full and final settlement.

For us to determine exactly what your best course of action is, please get in touch to arrange a free, no obligation face to face consultation.