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Individual Voluntary Arrangements (IVAs)

IVAs may sound like an easy way out of debt but beware

An IVA is a way to avoid bankruptcy (you can even set one up after you have been made bankrupt, which causes your bankruptcy to be cancelled – see below).

It is a voluntary deal you make with your creditors (the people to whom you owe money).

You promise to pay them part of what you owe them, usually by regular payments over a fixed period of time.

In order to set up an IVA, you must persuade 75% of your known creditors to accept the deal.
As long you keep up the IVA payments, none of your creditors is allowed to make you bankrupt and, when the IVA is over, the slate is wiped clean of those debts.
In order to persuade 75% of your creditors to agree to an IVA (rather than to go ahead and make you bankrupt), you will have to convince them that they will get more money through the IVA than they would if they were to make you bankrupt.
You will be required to provide full information about your finances to a “licensed insolvency practitioner” (usually a qualified lawyer or accountant) who will prepare a report for the court and your creditors. Your creditors will then meet and decide whether to accept your offer.
Your offer will in practice have to be the best you can afford (concealing information or lying to your creditors in order to get an IVA is a criminal offence).

Pros of an IVA

IVAs are flexible:

There is no minimum level of debt you must have before you can set one up.

There is no fixed length of time they have to last for.

There is no fixed amount or percentage of your debt you have to agree to pay.

So long as you keep up the payments under the IVA, your creditors are bound by the IVA. This means they cannot petition for your bankruptcy or bring any other kind of court action against you in respect of the debt you owe them.

You get to keep your home. That may not happen if you’re declared bankrupt.

An IVA does not impose the same restrictions as bankruptcy (e.g. disqualification from being a director)

You make the proposal for the IVA, so you have a say over what deal you offer to your creditors and which assets will be included in the deal. For example, you may be able to persuade your creditors that your home can be left out of the deal (though bear in mind that you still have to make an IVA attractive to them)

The expenses and costs of setting up and carrying out an IVA are lower than the expenses and costs of a bankruptcy.

The details of each IVA are not publicised in the press, unlike bankruptcy.

Cons of an IVA

Setting up an IVA is a complex procedure. You will need professional help and advice from a licensed insolvency practitioner.
IVAs are not free! They are likely to swallow up a few thousand pounds in expenses – money that could otherwise be spent paying off your debts.
An IVA will affect your credit rating.

Your access to credit for the duration of the IVA is, in practice, removed.
If you own your home and your creditors allow you to keep it, they may still require you to release some of the equity in it.
IVA providers can charge big, front-loaded fees. These are paid within the arrangement which means that a lot of the money you’re paying in at the beginning is actually going into paying their fees rather than the debt itself.

If you fail to keep up your scheduled payments you may get hefty penalty charges.
If you have very few assets, bankruptcy may be better.

When will an IVA be right for you?

If you believe that you can make a proposal which is attractive to creditors, i.e. more than they would get through your bankruptcy. As a very rough rule of thumb, you should believe yourself able to pay off about a third of your debts over 5 years – but what will be acceptable to creditors will vary from case to case.
If you want to avoid the restriction that bankruptcy places on you.
If you own your home and do not want to lose it, but are willing to release some of the equity to pay your debts.
Even if you are currently bankrupt and one of the above reasons applies to you.

When are IVAs a bad idea?

If you believe that you will not keep up the payments as promised.
If you believe that you cannot offer your creditors a better deal than they would get if they made you bankrupt.

If I think an IVA is right for me, when should I make a proposal?

As soon as possible! Here’s how to do it:

The first step to take is to find a licensed insolvency practitioner (your local county court can give you lists of local practitioners) to be your “nominee” (the person who will prepare the report on your finances to the court and your creditors).
With their help, you can make an application to court for an “interim order” which prevents anyone (including your creditors) from petitioning for your bankruptcy or taking legal action to seize your assets while you set up the IVA.
If the IVA is approved by your creditors, then the nominee will usually also become the supervisor of the IVA (the person who makes sure you keep up the payments). Supervisors are usually obliged to petition for your bankruptcy if you make a default in your payments under the IVA.

I’ve heard companies advertising IVA services? Are they a good idea?

These companies are selling a product like any other business and exist to make a profit.
They make their money from setting up hundreds of IVAs and taking a cut of the money that goes to creditors (in effect, that means they are taking some of your money before it gets to the creditors).
They generally only accept debtors with a minimum level of debt of around £15,000 (because otherwise they don’t make as big a profit).
They generally offer IVAs with a length of 5 years.
The services that these IVA companies provide range from providing the nominee setting up the IVA, right through to providing the supervisor.

If you’re going to use a company, it is very important to choose a reputable one.

How do I choose a company?

The industry is at present not very well regulated.
There is only one body which oversees it (DEMSA – the Debt Managers Standards Association) and it only has 5 members! Their contact details can be found on DEMSA's website at
Beware of websites which appear to offer independent advice (except this one, obviously!)
Some give themselves names to suggest that they are a governmental body or are only interested in offering you “advice”. In fact they are trying to sell you an IVA.

They are running a business and their advice must be treated the same as advice given to you by anyone selling you anything!
Good impartial and independent websites are very few on the ground. The best is www.insolvency.gov.uk which is a site run by the Department of Trade and Industry.

The chart below shows the enormous increase in the number of IVAs
in relation to bankruptcies:

Bankruptcies / IVAs	2004	2005	First half of 2006 alone	% increase 2004 - 2005	% increase mid-2005 to mid-2006
No. of bankruptcies	35,898	47,291	30,333	31.7	32.5
No. of IVAs	10,752	20,293	19,340	88.7	153.2

Bankruptcy grows steadily while IVAs rocket in popularity

(Source: Office of National Statistics)

Want to know more?

Listen to the Moneymagpie Podcast: Do you really need an IVA?

Links

Independent government advice

R3, the Association of Business Recovery Professionals (but who also deal with personal insolvency) have published a leaflet “Is a Voluntary Arrangement Right for Me?” Download it here

Jasmine and the Moneymagpie team
Moneymagpie Moneypedia
14.02.2008