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If you’re struggling with debt, it’s so important to reach out for help. Learn how an IVA can make your unmanageable debts manageable again.
If you’re looking for a way out of problem debt, starting an Individual Voluntary Arrangement (IVA) is one of a number of solutions available - if you live in England, Wales or Northern Ireland. This blog is for anybody wanting to know more about how the solution works and how it could pave the way towards a debt free future.
If you live in Scotland and want more information on the solutions available to you, have a look here.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a formal debt solution which creates a payment plan allowing you to reduce your monthly payment towards your unsecured debts to an affordable level. It takes into account that you are unable to pay all your debts off in a reasonable amount of time and all your unsecured debts should be included if you were to go ahead with an IVA. So, at the end of an IVA, which usually lasts for five-six years, the remaining debts on your plan are written off.
Is an IVA a debt management plan?
The answer to this question is no. An IVA is a way of managing problem debt, but the term Debt Management Plan is used to describe a different debt solution.
A Debt Management Plan (DMP) also allows you to cut your monthly contributions to your debts to an affordable level, but the difference with this solution is that you would still pay back everything that you owe, just over a longer time period. There are some other key differences between the two solutions, so it’s important not to get them confused. While a DMP allows you to pay less to your creditors every month it comes along with its own list of pros and cons that you need to be aware of before you start one. For more information on the advantages and disadvantage associated with this solution, have a look at our dedicated page.
An IVA is a formal way to deal with insolvency, which is the official term used to describe the situation of not being able to pay your debts back. As we said, it can involve some debt write off at the end and, if you started an IVA, it would be recorded on the Insolvency Register, a publically accessible list of everyone who is insolvent in the country. DMPs are an informal agreement between you and your creditors, and it is possible to set one up directly yourself, you don’t have to use a debt solution provider and your name will not appear in any official list.
The advantages of an IVA
The main advantage of an IVA is that your payments are reduced from the contractual amounts, giving you financial breathing space and relieving you of the worry over whether you’ll be able to afford all your essential costs each month.
On an IVA, you would come to an agreement with your creditors about what you can afford to pay and any remaining debt, along with interest and charges, would be written off.
You’ll be legally protected from your creditors on an IVA. When your creditors agree to the IVA they are confirming that they are happy with the reduced payment, and if you stick to your end of the deal, they have accepted that they will write the rest of your debts off when it finishes. This means an end to letters, emails and calls chasing you for the money that you owe, and a stop to any legal action that the creditors may have started against you already. For information on how an IVA can help you with a CCJ, have a look at this blog.
An IVA can be the best option if you’re a homeowner and you’re worried how being insolvent (being unable to repay your debts) is going to affect your house. You do not have to sell your house if you start an IVA, as you may have to if you go bankrupt. Six months before the end of the IVA, you would be expected to try and release equity – for example by remortgaging (although you would never be expected to release more than 85% of the value of your home). If were unable to release the equity, then your IVA would simply be extended for up to another twelve months so you could continue to pay into it to make up for this.
The disadvantages of an IVA
Whilst there are many advantages to IVAs, like any debt solution, IVAs also have downsides that it is important to be aware of as well.
An IVA would damage your credit history, which means that if you were to apply for any kind of credit in the future, the process could be more difficult and/or more expensive because you won’t qualify for the best interest rates. This is because your IVA would show on your credit file for six years after the date that you started it and would show any potential creditors that you have not kept to your contractual agreements.
Because you are expecting your creditors to write off debt at the end of the plan, they would expect you to put everything you can afford towards your debts whilst the IVA is ongoing. This means that you would have to stick to a fairly strict budget for five-six years. The budget would allow you to afford all your essentials and live comfortably, but may require some sacrifice when it comes to non-essential expenses.
An IVA would only help you with unsecured debts – no secured debts are allowed to be included on the solution. Having said that, you should find that you’re better able to afford your secured repayments if you have an IVA, because your unsecured ones will have come down to an affordable level.
Your creditors have to agree to the plan
For an IVA to go ahead, your creditors have to agree to accept lower monthly payments and to write off the rest of your debts, once you’ve completed the plan successfully. Creditors often do agree to do this, especially if they can see that you are struggling to maintain the contractual payments, and that you are committed to paying back the most that you can realistically afford.
With your input, your IVA provider will put together an IVA proposal for you. The proposal outlines what you are offering to pay your creditors and why you need to reduce your payments by showing your budget – so all your incomings and outgoings. Your IVA provider would then arrange a “creditor meeting” which gives the people you owe money to the chance to vote yes or no to the IVA. You do not have to attend this meeting yourself, your Insolvency Practitioner (IP) will do so your behalf.
In order for the IVA to go ahead, you’d need creditors representing 75% of the value of your debt, present at the meeting, to vote yes.
So there you have it, you now know how an IVA works in a nutshell and that it’s a way to manage your debts - but not the same thing as a Debt Management Plan. Don’t forget to pick up the phone and speak to one of our advisors if you have any more questions, or click here to learn about the other solutions out there.
by Christine WalshBack to blog home