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Sep 19

What are Individual Voluntary Arrangements (IVAs)? And how can they help you?

Reading Time: 6 mins

Individual Voluntary Arrangements (IVA) can be one method used to avoid bankruptcy.

You can set one up even after you have already been declared bankrupt, causing your bankruptcy to be cancelled.

It’s basically a voluntary deal made with your creditors that you can ensure is flexible enough to suit you, giving you more control over your debt management.

However, there are intricacies involved in the process of changing your repayment plan, and this can make IVAs complicated and expensive to establish. Despite this, it has to be said that the additional expense and effort is preferable to losing your home and possessions.

That’s why we’ve put together this summary outlining all things to do with IVAs, so you can decide what works for you.

 

What is an IVA?

Individual Voluntary Arrangements (IVAs)

An IVA is essentially a formal agreement to pay creditors part of what you owe them, usually through regular payments over a fixed period of time that spans five to six years.

To get the process started, you’ll need to persuade 75% of your known creditors to accept the deal. After that, as long you keep up the IVA payments, none of your creditors can sign you off as bankrupt.

More importantly, any unsecured debt left after the IVA period is written off. Alternatively, you can make a one-off payment which is called a lump-sum IVA.

In order to persuade 75% of your creditors to agree to an IVA as opposed to the bankruptcy route, you’ll have to prove to them they will make more money through the IVA than they would if you went through the bankruptcy procedure. By staggering the payments over a longer period, there’s likely more opportunities for revenue for the creditors, so it usually benefits them, too.

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.

Important! Your offer must be the best you can afford. Concealing financial information or lying to your creditors in order to get an IVA approved is a criminal offence. So… don’t break the law.

 

Pros of an IVA

  • Affordable: As long as you’re making monthly payments over the agreed period, there’s no fixed percentage on the debt payable each month. This is ideal if money is particularly tight one month, allowing you to pay less with the assumption you’ll pay more later. You decide the pace of repayment.
  • Less restrictions: Bankruptcy can involve things like losing your property, disqualification from being a director or being publicised in the press. The costs and expenses involved in setting up an IVA are far less restrictive than this.
  • Monthly fees: Once your IVA is set up, there will be monthly fees. However, instead of having to worry about tackling yet another bill, these are automatically included in your monthly payments.
  • The pay-off: If, within the IVA process, you hit the jackpot and have enough to clear the remaining debt, you can. Simply pay a one-off ‘full and final’ settlement.
  • Protection from creditors: An IVA removes the worry of what happens once the IVA period is over. The remaining unsecured debt is written-off. This means creditors can’t chase you for that money.

 

Cons of an IVA

  • Complicated process: You’ll need to seek out professional advice from a licensed insolvency practitioner and factor in the cost of this – likely a few thousands pounds in expenses. But, in the grand scheme of things, this is probably a worthwhile investment of your money.
  • Extraneous fees: Although the IVA is geared towards helping you pay off your debt, the process does include fees for the IVA providers. The first few payments you make will likely be paying off IVA fees rather than your debt. Good thing the plan can be staggered over a few years!
  • Credit rating: Whether you go down the path of bankruptcy or an IVA, both will tarnish your credit rating. Your access to credit will also be removed for the duration of your IVA.
  • Equity: Owning a home may count against you in this circumstance, as your creditors may require you to release some of the equity. If you fail to keep up your scheduled payments, you may incur hefty penalties. However, this is better than a total repossession.
  • Not securing creditor approval: The creditors are within their rights to reject your request for an IVA if they believe you have not provided enough substantial evidence to prove you’ll be able to make the monthly repayments.

 

When will an IVA be right for you?

Individual Voluntary Arrangements (IVAs)

If you want to avoid the restrictions and stigma of bankruptcy, and you’re in a position where you think you have the proof necessary to get the creditors on side, then an IVA is something you should seriously consider.

To calculate whether an IVA is right for you, you should be able to prove you’re capable of paying off around a third of your debts over a 5-year period. Although this time period can vary according to the creditors.

An IVA enables you to reorder your finances on your terms, providing you with that second chance to avoid bankruptcy.

All you need to do is convince your creditors that, in exchange for their cooperation, they will receive more by cancelling your bankruptcy and releasing your assets.

 

When are IVAs a bad idea?

If you have very few assets or doubt you can commit to keeping up regular payments, bankruptcy is a better option.

 

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”. They will present your financial report to the court and your creditors, for the aforementioned fee.

With their help, you can then make an application to court for an “interim order”, which basically prevents creditors 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 become the supervisor of the IVA, ensuring you keep up the payments.

Important! Supervisors are 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?

Individual Voluntary Arrangements (IVAs)

These companies are selling a product to you, just like any other business, and therefore exist to make a profit.

They make their money by setting up hundreds of IVAs and taking a cut of the fee that goes to the creditors owed. In effect, they take some of your money before it gets to the creditors, which is a pretty standard practice with IVAs.

IVA providers generally only accept debtors with a minimum level of debt of around £15,000, otherwise their profit is minimal. And, generally, they offer IVAs with a minimum repayment time-frame of 5 years.

The services that these IVA companies provide range from hiring the nominee to appointing the supervisor.

So, if you’re going to use a company, it’s very important to choose a reputable one.

 

How do I choose a company?

Companies providing IVA services are overseen by DEMSA, which stands for the Debt Managers Standards Association. Their contact details can be found on DEMSA’s website.

Beware of websites that appear to offer independent advice (except this one, obviously!)

Some give themselves official-sounding names to suggest that they are a governmental body, or are only interested in offering you “advice”. So be sure to remember that they are running a business and their advice must be treated the same as advice given to you by any other sales person!

If in doubt, go to the UK Government’s page for more information on IVAs and be signposted to trusted organisations.

 

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