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What is an IVA? Individual Voluntary Agreements explained
What is an IVA?
An IVA, or Individual Voluntary Agreement, is a financial arrangement intended to manage significant debts. Individual Voluntary Arrangements are usually made between a consumer and the organisations to whom money is owed. An IVA can be helpful in the case of an individual owing money to a number of different companies or organisations, through personal loans, credit cards or arrears on household bills. The repayment process is usually carried out by an intermediary—normally an insolvency practitioner—who oversees and manages the repayment of debts to the creditor. An IVA is often seen as an alternative to declaring bankruptcy, facilitating the repayment of some or all debts owed.
Unlike a Debt Management Plan, where you can work directly with your creditor, for an IVA you’ll need to work with an insolvency practitioner to take out an IVA. An insolvency practitioner is a professional who specialises in consolidating and managing the repayment of debts on behalf of the consumer. The insolvency practitioner is responsible for dividing the money repaid between all the individuals or organisations to whom the client is in debt. A fee is charged for the insolvency practitioner’s services, as discussed below.
If you apply for an IVA, the insolvency practitioner will draw up a proposal and put this forward to the companies to whom you own money. The companies who own 75% or more of the full sum of your debts need to approve a proposed IVA, which will consolidate your debts—without their approval, the IVA proposal put forward by your insolvency practitioner will be rejected.
Who is an IVA for?
Like Debt Management Plans and other personal finance plans for those in debt, an Individual Voluntary Agreement is aimed at those who are struggling to repay debts owed to one or more creditors. An Individual Voluntary Agreement can be a suitable option for someone who has more than one person or organisation to whom they owe money, as the insolvency practitioner can act as an intermediary between the debtor and all the creditors. As such, an IVA offers the opportunity to consolidate various debts into one payment, which is then distributed amongst all those who are owed money.
IVAs are typically chosen by those who, for one reason or another, do not wish to declare bankruptcy. If you have an Individual Voluntary Agreement, you agree to make regular payments, through the insolvency practitioner; this means an IVA is most suitable for those who have the funds and financial security necessary to make regular payments over a fixed period. An IVA is not a cost-free solution, however, as we shall see in the ‘downsides’ section of this guide; given the various fees involved, it’s worth factoring in the cost-to-benefit ratio when thinking about an IVA. Based on the fees involved, those with more than £10,000 worth of debts are likely to gain the most from taking out an Individual Voluntary Agreement, compared to declaring bankruptcy.
How does an IVA work?
Once an Individual Voluntary Arrangement is established, it works by allowing an individual to pay off their debts over an agreed fixed period, usually around five years. Under an IVA you might make 60 or 72 repayments over the agreed period, or, alternatively, you might cover the costs by paying a one-off lump sum. If you have an IVA which agrees a lump sum repayment, this sum can come from redundancy pay or another kind of payout, or the proceeds from selling property; alternatively, some people who take out an IVA receive a gift from family or friends which they can use for the lump-sum repayment. An IVA which is covered by a one-off payment will normally last for around six months, rather than the longer period for those who are managing their IVA via regular repayments.
What are the benefits of an IVA?
The repayments on your IVA and the terms of the agreement are usually established based on what you can afford to pay. This makes an IVA a constructive and approachable way to repay your debts; while you may, initially, have borrowed more than you can afford to pay back, repayments on an IVA should correspond to what you can currently afford. The attention paid to affordability when the agreement is set up can make an IVA a sensible and approachable option for those with significant debts.
With an IVA you have a clearly defined period in which you are required to make repayments; you will not be expected to continue paying beyond the length of the agreement. Because repayments are limited to a fixed period—for example, five years—and are designed to work within the boundaries of what you can afford, you will probably end up paying less money than you owe.
Better for business owners
If you run a business, you may wish to avoid declaring bankruptcy at all costs—those who are bankrupt cannot be company directors. An IVA can help you manage and repay your debts and allow you to carry on running a business, albeit with some restrictions on your financial abilities and impact on your credit rating, as emphasised later on in this guide.
Keeping your job
An IVA can be a better alternative to declaring bankruptcy, in the case that bankruptcy would cause a major threat to your job security. Some professions cannot be performed by those who are declared bankrupt, and certain professional organisations will not have members who are bankrupt, or have declared bankruptcy in the past. For example, you are unlikely to be able to work as an accountant if you have ever declared bankruptcy, and the Institute of Chartered Accounts in England and Wales would not allow you to be a member of their organisation. If you are a practising chartered accountant, this would, in turn, have detrimental implications for your ability to practice. Similarly, those in law enforcement, including the police, as well as legal professionals such as solicitors and barristers may find that bankruptcy would compromise their professional role and may lead to redundancy; in these cases, IVAs could be a suitable option for consolidating and repaying debts.
Keeping your home
Homeowners may have concerns about declaring bankruptcy, as, under these circumstances, any equity from the home is often a condition of repaying charges. With an IVA, you are not automatically required to sell your home, making this a better option for some homeowners. While taking out an IVA cannot guarantee that you will not need to sell your home, or that you avoid repossession, it means that there may be other options available to you, including remortgaging or downsizing and making use of proceeds for a lump-sum repayment.
Those who feature on the bankruptcy register can also find it difficult to be approved as rental tenants by private landlords, or may be asked to provide details of a guarantor who will cover the cost of rent if you are unable to do so. An IVA can be a better option in terms of securing your home, whether you’re a renter or a homeowner. However, it’s important to check the terms of your mortgage and/or tenancy agreement, before you decide whether an IVA is appropriate for you.
What are the downsides of an IVA?
Although an Individual Voluntary Agreement offers an opportunity to begin to get on top of debts, and can be a positive step forward in taking control of your finances, there are a number of disadvantages associated with taking out an IVA, so it’s not a decision to be taken lightly.
Can cost more than bankruptcy
An IVA is intended to help you repay debts, rather than writing them off. This means that, in the long run, if you take out an IVA you will pay more than you would have done in costs if you had been declared bankrupt. However, as we noted above, it’s likely that, if you have an IVA, you won’t have to pay the entire sum owed, as your repayments will end after the fixed term of the agreement.
Can you keep up the repayments?
Although an IVA is designed to be affordable, because most IVAs last for a set period of time—for example five years—you need to make sure that you are confident that you’ll be able to cover that costs regularly throughout the duration of the agreement. If you cannot keep up the agreed repayments on your IVA, then you may find yourself in a less favourable position than when you began.
There are some costs involved in setting up an IVA. When you set up the agreement, there will be an initial set up fee, usually agreed with your insolvency practitioner. This covers costs such as putting together a proposal to convince your creditors to agree to the arrangement. You make an initial payment at the time of setting up the IVA, so if the proposal is not accepted by the creditors who own at least 75% of your debt then you will lose the initial payment, in addition to not making progress towards clearing your debts.
Aside from the initial payment, there are usually a few other costs associated with an IVA, including handling fees on repayments and disbursements (associated third-party costs), meaning that not all of the money you pay towards the IVA is directly used to cover your debts.
What are the long-term implications of getting an IVA?
One of the major disadvantages of taking out an Individual Voluntary Agreement is the impact on your credit score. An IVA will be recorded on your credit file and will be visible on your records with the major credit referencing agencies for six years.
Hitting your credit score
The cumulative impact of the debts you’ve incurred coupled with the consequences of having an IVA can make it challenging for you to be accepted for credit in the future. You may find that certain financial products are not available to you, and that you are limited to basic bank accounts, due to a low credit score. A poor credit score can also have implications for those who are financially linked to you, for example, those with whom you have a joint bank account or share debts or products such as a mortgage. The impact of debts and an IVA can affect the credit score of loved ones such as your partner, and might even impact upon their professional life if they hold positions in certain industries.
Limitations on your financial options
The immediate and longer term effects of having an IVA for your credit score will likely have a negative impact on your ability to apply for credit in the future. This can restrict your ability to get bank accounts offering overdraft facilities, limit your options for taking out credit cards or store cards, and may prevent you from taking out financing to purchase goods such as furniture, white goods, cars or mobile phones. The restrictions placed on taking out credit and the limited financial products available to you can make it a harder and slower process to rebuild your credit score during the IVA, in the six years that follow, and even beyond.
Rebuilding your credit score
So, while an IVA will be visible on your credit records for six years it could you a long time, far beyond the terms of the agreement, to rebuild your credit score. As well as keeping up with repayments, you will need to build good financial habits and sustain these to make sure that your financial position is where you want it to be in the long run.
How do I know if an IVA is right for me?
Financial struggles and problems with debt can be a scary prospect. It’s important to think about practical steps you can take to manage your money and get back on top of your finances. Weigh up the pros and cons of the different options available to you, from bankruptcy and Debt Management Plans, to Individual Voluntary Agreements, and make sure you choose the pathway which fits in with your personal financial circumstances, your profession and your future plans.
An IVA can be a suitable way to avoid further negative financial and personal consequences from your debts, consolidating your repayments, and enabling you to work with an insolvency practitioner to repay what you can afford. While there are negative aspects to IVAs, which do need to be factored in, the opportunity to repay your debts in a structured way can be a valuable chance to get your finances back on track.
Whatever your decision, talking to a qualified professional about your challenges with debt and working together to find the best solution for you is key to a stress-free approach to managing your debts and moving towards a brighter financial future.