How does an IVA work?
If you’re struggling with debt repayments and are looking for the best solution for you, you may have heard of an individual voluntary arrangement– otherwise known as an IVA. But how does an IVA work?
An IVA is a legally binding agreement between an individual and their creditors in the form of a financial plan involving affordable monthly payments that work towards paying back unsecured debt. It’s important to understand the potential implications of an IVA and whether you are eligible before committing to an agreement.
In this guide, we’ll talk you through how an IVA works, including what makes you eligible for an IVA and the types of debt that can be covered in the agreement, so you can understand whether an IVA might be the best debt solution for you. You can also call us at 0800 464 7235 for further help and debt advice.
What Is An Individual Voluntary Arrangement (IVA)?
An individual voluntary arrangement (IVA) is a legally recognised debt management solution between you and those to who you owe money (otherwise known as your creditors). The IVA will work towards paying off all or some of your current debt with regular monthly payments over a duration of around five years. After this period, any remaining unsecured debt will be written off.
An individual voluntary arrangement will need to be set up by a qualified individual, commonly known as an insolvency practitioner. They will work on your behalf to create and manage the arrangement, including contacting creditors on your behalf and managing financial payments.
Instead of making multiple monthly payments to multiple creditors, you will only need to make one payment to your insolvency practitioner, who will then distribute money to each of your creditors accordingly. An IVA is a legally binding agreement, so it’s really important you stick to the terms of the contract in order to avoid potential court action.
Unlike other debt solutions, such as filing for bankruptcy, your assets such as your home and car will be protected so long as you keep up with the repayments and terms of your IVA agreement. Setting up an IVA can, for many people, be a positive way to regain control of their finances.
Nevertheless, an IVA is a legally binding contract that will have negative implications for your credit file and credit rating. It’s important that you seek free debt advice from a debt charity or money advice service (such as Stepchange) before deciding on a debt solution.Check if you qualify
What Makes You Eligible For An IVA?
If you’re struggling with unsecured debt and failing to meet your current repayments, an IVA could be a good solution. Nevertheless, you will need to meet some essential criteria in order to qualify for an IVA:
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Our trained advisors are here to help, so if you think an IVA proposal is one of the best debt solutions for you, don’t hesitate to call us on 0800 464 7235 to speak to one of our trained debt advisors or click below to see if you qualify…Check if you qualify
Types Of Debt That Can Be Covered In An IVA
Credit card debt
This typically includes money owed to credit card companies due to missed payments and the interest that has accumulated.
Payday loans are typically small, short-term loans with very high interest rates. Individuals will usually borrow money with the intention of paying it back on their next payday, but interest can accumulate incredibly quickly.
Store card debt
Store card debt is similar to credit card debt, except it is usually only spent at one store. You’ll usually be able to purchase items on a store card and then receive a monthly or quarterly bill. If, at this point, you fail to repay in full, interest will begin to be charged.
Overdrafts let you borrow extra money through your current account. Some banks allow interest-free overdrafts up to a certain amount, whereas others could charge interest as soon as you go overdrawn.
How Is An IVA Set Up?
As an IVA is a legally binding arrangement, it must be set up by a qualified insolvency practitioner (IP) – you can’t set one up on your own. You can either go through a debt management company, which will find an IP on your behalf, or you can search for a registered insolvency practitioner online.
Insolvency practitioners will typically charge for their service, although some may work with debt advice charities to provide their services for free. Your insolvency practitioner will have control of your finances, so you should ensure that they are registered with the FCA and the Insolvency Practitioners Association.
Once you have chosen an IP, they will be in charge of setting up and managing your IVA for the duration of the arrangement. In order to do this, you will need to provide them with information about your financial situation, including key documentation such as bank statements and information about your assets and current debts.
This information will be used to create a reasonable IVA proposal for you and your creditors, and your insolvency practitioner will be in charge of contacting and liaising with your creditors about this arrangement on your behalf.Check if you qualify
How Long Does It Take To Set Up An IVA?
If you’ve decided that an individual voluntary arrangement (IVA) is the best-unsecured debt solution for your situation, it can be set up in around 4-6 weeks on average, although this will depend on a few factors (such as the majority of your creditors accepting the proposal).
If you’re looking for immediate debt relief and assistance, you can apply for ‘Breathing Time’ – a government debt respite scheme – which will give you 60 days of respite from interest, fees and creditor contact. This could be a useful solution whilst you are setting up an IVA, should you feel stressed about your current situation.
Your insolvency practitioner will use your financial information to create an IVA proposal, so the sooner you send over accurate documentation, the quicker the process will be. Once they have created this, they will contact your creditors and negotiate with them on your behalf. Once 75% of your creditors agree to the proposal, your IVA will be ready to go.
How Are Debts Repaid To Your Creditors?
One key benefit of having an IVA is that you will only need to make one payment per month to your insolvency practitioner rather than making multiple payments to different creditors. Instead, your IP will consolidate all of your debts into one payment, and they will distribute the appropriate amount to each individual creditor on your behalf.
Your practitioner will also deduct their fee from this monthly payment and take care of any fees and charges along the way. All you need to do is make sure that you keep up with the payment outlined in your IVA proposal each month.Check if you qualify
How Does An IVA Work For Homeowners?
If you own a home, the value of your property will be taken into account during the creation of your IVA. You’ll never be expected to sell your home to pay back your debts, but you could be asked to remortgage your property towards the final year of your IVA to release equity that will be used as a lump sum payment towards your debts.
During the penultimate year of your repayment plan, you’ll be required to get a valuation on your home. This is so that the amount of equity can be calculated – which is essentially the amount of money you would make if you sold the property after repaying any mortgage loans.
If this valuation indicates that there is £5000 or more equity in the property, you will be expected to remortgage the property and use this amount as a lump sum to go towards paying off your remaining debts. Alternatively, if the valuation is less than £5000, you won’t be expected to remortgage your property.
There is usually an upper limit on the amount you’ll be expected to contribute to your IVA after remortgaging your property, but this will be based on the value of your home and the size of your original mortgage. You will never be expected to sell your home or be made homeless as part of an IVA.
What Happens If Your Financial Circumstances Change During An IVA?
It is common for your financial situation to change throughout the duration of an IVA – for better or for worse. Any changes in your personal circumstances should always be reported to your insolvency practitioner, and they will advise you on the best steps to take.
If you encounter a sudden short-term loss of income, your IP will be able to apply for a payment holiday for you. This could allow you some payment relief during this period, but it is only a short term solution: repayments will need to be continued after this duration.
If you are consistently struggling to meet your IVA payments each month and feel you might miss payments due to a long-term reduction in earnings, you could apply for a payment reduction. Your IP will need to liaise with your creditors about this possibility.
Alternatively, if your financial circumstances improve during your IVA, you will need to inform your IP and may need to increase your monthly repayments. You are legally obliged to tell your IP of certain financial changes, such as a permanent salary increase.
Additionally, most individual voluntary arrangements will include a windfall clause. This means that any unexpected financial payments, such as lottery wins or inheritance, will need to be used as part of your IVA.Check if you qualify
What’s The Impact Of An IVA On Your Credit Rating And Credit File?
Although seeking to establish an IVA is a positive step towards regaining control of your finances, the fact that you need a debt solution will still be reflected in your credit rating for the duration of your agreement and for a period of time afterwards.
Details of your IVA will be recorded on your credit report for six years, which is a publicly available record of your credit history that carries details of your financial situation (including the use of debt solutions). After six years since the beginning of the IVA, it will be removed.
As well as this, if you apply for an IVA, you will automatically be listed on the Individual Insolvency Register. This information will be available to creditors until three months after your IVA ends, which could make it difficult for you to obtain credit in this period.
If you’re worried about the long term impacts of an individual voluntary arrangement, call our team at IVA Helpline today on 0800 464 7235 for debt advice and assistance.
Frequently asked questions
Will my assets be at risk if I set up an IVA?
Assets with secured loans, such as your home, will be protected in an IVA, as mortgage payments will be taken into account when calculating an appropriate monthly repayment.
Other assets should be protected so long as you can prove that they are necessary – such as a car that you use in order to travel for work.
How do I find a reliable Insolvency Practitioner?
It’s really important to ensure that your insolvency practitioner is licensed and registered with the FCA. You can easily find a registered IP on the GOV.UK website.
Will an IVA affect my credit score forever?
Although it may have negative short term implications, an IVA won’t affect your credit score forever. It’s only kept on your record for six years in total from the date that your agreement began: after this, you will be able to rebuild a positive score.
How many creditors can be paid in one IVA?
There is no maximum amount of creditors that can be paid in one IVA. Some debts are unable to be included in an IVA, however, such as secured debts and student loans.