How does an IVA work?
An IVA works by allowing you to repay a portion of what you owe over a specific length of time in instalments agreed with your creditors. Once this term has finished, an IVA writes off the outstanding balance that you owe and gives you freedom from your debts.
In the sections below, we’re going to go into how an IVA works in a little more detail, including what debts you can and can’t include, how your payments are calculated and how long it lasts.
What debts can be included in an IVA?
An IVA can and should include all your unsecured debts. If you’re not sure whether your lending is secured or unsecured, here’s an explanation of the two:
What are unsecured debts?
Unsecured debts include credit cards, store cards and personal loans, and are provided by lenders who may charge interest and who ask that you pay your monthly balance on time when requested. They do not ask you to secure the funds you borrow against anything, like a property or a car for example. If you’re not able to make a payment for some reason, the provider, after attempting to communicate with you to resolve the situation, may take further action to recover their money. This can be through a debt collection agency, or even court action if the situation progresses far enough.
What are secured debts?
Secured debts include mortgages, hire purchase or log book loans. In comparison to unsecured lending, providers offering secured lending can recover their debt by taking a specific item of property if you are unable to make your payments. This is usually the thing you bought with the money, like your home or car, but this is not always the case (for example, with a logbook loan you offer your car as security for a cash loan).
If you fail to make your monthly payments the provider can take, or repossess, the item and sell it to pay off some or all of your debt. This will normally only happen after a period of time has passed and numerous attempts to resolve the situation have been attempted.
The secured debts you’re most likely to have are a mortgage, if you’re a homeowner, and a car you’ve bought on hire purchase (HP). So, if you took out a mortgage to pay for your home, it’s your home that acts as security on the money loaned. And, if you’re not able to make your monthly payments, the mortgage provider can repossess the house and sell it to get back some or all of what they’re owed.
Secured debts and IVAs
Although secured debts cannot be included in an IVA, the debt solution can make them more affordable. When you enter into an IVA, your IP will work out how much you can afford to pay to your unsecured creditors once your essentials have been covered. These essentials include secured debts like your mortgage and other priorities like food, utility bills and transport. The money you have left over after these have been paid is portioned up and sent to your creditors. Because everything is calculated to make sure you can afford it, it can make your secured debt payments more manageable.
What debts cannot be included in an IVA?
Aside from secured debts, there are some other debts that cannot be included in an IVA. These are:
- student loans,
- child support arrears,
- magistrates court fines, and
- court-ordered maintenance arrears.
As these cannot be included in your IVA, you will have to arrange to pay these separately. An allowance for these will be included as part of your monthly outgoings budget.
Can debt be added to an Individual Voluntrary Arrangement?
It’s important to include all your unsecured debts when you enter an IVA if you want to be fully protected by it. If a creditor doesn’t receive notice of your IVA, they may not be bound by it and you won’t have the benefits of your IVA in relation to that debt.
But if you suddenly find a debt that you forgot to include at the start and you want to add it to your IVA, this may still be possible.
Whether it can be included will depend on how large the debt is. Your IP has the authority to add debts that don’t significantly affect what the other creditors are expecting to receive through the IVA if they existed before you applied for the solution. However, if you have larger debts that have not been included and these might alter the amount you’re able to pay the creditors listed in the IVA, your IP will have to arrange a variation meeting to ask to change the terms of your IVA so the new debt can be included. This allows the creditors to decide if they are willing to accept the new terms of the IVA.
If your creditors do not agree to include the new debt, it cannot be included in the IVA and you will need to negotiate with them to try to agree to repay it outside of this and on top of the monthly amount you already pay. Your IVA will continue with the original creditors, but you would not be able to reduce your IVA payment in order to make money available for the new payment. To avoid this situation, you should be as thorough as possible when you set up the IVA to make sure you’ve included all your debts.
If you are in any doubt as to whether you’ve included everything you owe, it’s best to talk it through with your IP. You can also check your credit file using one of the three credit reference agencies – Experian, Call Credit and Equifax - as you’ll find all the details of your lending going back over the last six years here.
How are my payments calculated for an IVA?
When you enter into an IVA, you commit to making a single payment per month for the life of the solution - unless, as we’ve already mentioned, you receive a cash lump sum that lets you pay off your unsecured debts in full. If you do, you may be able to avoid having an IVA altogether if you offer the amount as a full and final settlement.
Your monthly payment is worked out by your IP and takes into account all your income and outgoings. Your income includes:
- money given to you by friends and family, and
- returns on investments.
Basically, all the money you receive into your household is included. Your essential and priority outgoings are then calculated. There’ll be money allocated for you to buy food and clothes and cover transport costs, as well as all your priority bills. Missed priority bills can lead to more serious consequences if they remain unpaid. These outgoings include:
- rent or mortgage,
- loans secured against your home,
- council tax,
- water charges,
- court fines,
- income tax, national insurance and VAT,
- high purchase loans, and
- TV licence.
Once your essentials and your priority bills have been calculated, what goes out each month is deducted from what comes in. The figure that remains is called your disposable income. You’ll be expected to pay this amount towards your IVA, and it is divided fairly between your creditors by your IP once its fee is deducted.
How long does an IVA last?
Most IVAs are expected to last five years, although some last longer and others are shorter. Shorter-lasting IVAs are rare and only happen in certain circumstances, for example, if you have a lump sum available to make a single, full and final payment as settlement for your IVA.
There may be times when your IVA needs extending. One example might be if you’re not able to release the equity from your home to pay into the IVA. If you’re a homeowner, you may be expected to remortgage six months before the end of your IVA so you can release the equity in your property and pay the funds you raise into your IVA. If you’re not able to do this, you may need to remain on the IVA, continuing to make your agreed monthly payments for up to 12 months more (up to the value of your equity).