If you’re currently worried or struggling with debt, an Individual Voluntary Arrangement (IVA) is one of the commonly used financial solutions. But with any debt management and resolution, it’s vital to understand how it works before you decide on the right course of action.
To make sure an IVA is suitable for you, it’s important to know what you’re committing to, and what effect it may have on your family and future.
Individual Voluntary Arrangements are available if you live in England, Wales and Northern Ireland. If you live in Scotland, you should look at a protected trust deed. And you’ll need to work with an insolvency practitioner (IP) to go through the process.
What is an IVA & how does an IVA work?
An Individual Voluntary Arrangement, or IVA, is a formal, legally binding debt solution, which is a form of insolvency.
It allows you to potentially write-off up to 90% of your existing debts, based on what you can reasonably afford to repay. The exact amount will vary depending on your personal circumstances, and who you choose to arrange your IVA.
An IVA commits you to monthly repayments over 5 or 6 years, which are distributed among your creditors. Any debts remaining after this period will then be written off.
The payments will take into account your monthly income to ensure that the IVA is realistic and affordable. It can also take into account any lump sums you expect to receive. If you come into a financial windfall during the arrangement period, you will usually need to use this to pay your creditors. And this can also potentially apply if you’re due to receive money because of something which occurred before your IVA was approved, even if the arrangement has finished.
If you own your home or currently have a mortgage, it will include any equity available. Some possessions are always excluded from an IVA, but other goods can be included with your decision. And any assets you have will also be taken into account.
An IVA is legally-binding under a UK court, but you don’t have to actually attend any court dates. When the proposal for an IVA is agreed by your creditors, this will be reported to the court to make it
An IVA will be reported to the court when accepted by all parties – but you don’t have to attend any meetings or court dates in person. These will all be arranged by an insolvency practitioner, although you may find it useful and helpful to take part when the meeting is arranged for your creditors to vote on the IVA proposal.
When you have entered an IVA, the interest and fees associated with your debts are frozen, and creditors can take no further action against you, including contacting you directly.
When you have entered an IVA, your information will be placed on the public Registers of Insolvencies for the direction of the plan, and will affect your credit rating for six years.
At the end of the IVA, any remaining debts are written off. Which means you will then be debt free.
Do I qualify for an IVA?
To be eligible to quality for an IVA, you will need to meet specific requirements, which are:
- You need to live in England, Wales or Northern Ireland.
- Your unsecured debts total £6,000 or more. But fees mean that it may not be the right option unless your debts are £10,000 or more.
- The money is owed to two or more creditors.
- You don’t want to deal with your creditors directly.
- You’re currently struggling to make payments on your unsecured debts.
- Your regular income is enough to cover all living costs with enough left over to make monthly payments. Or you have a lump sum either available now or guaranteed in the near future.
The criteria for qualifying can be flexible, so it’s important to research your options and get advice from experienced debt advisors before settling on a particular debt solution. You can also speak to an insolvency practitioner to discuss whether an IVA is right for you, before starting the formal process.
Is an IVA worth it?
Only you can decide whether or not an IVA is worth pursuing in your individual situation. It has some advantages over other debt solutions for those who meet the qualifying criteria, but the legally-binding nature of it, and other conditions of the arrangement, can be an issue.
There are also implications depending on your profession. But this depends on the recognised professional body responsible. Your employer will not be informed of your IVA, although they can obviously check the public Registers of Insolvency. The potential implications can vary between different organisations even within one industry, some examples are:
- Company directors
- Accountancy, banking and financial services
- The police, fire service, prison service and armed forced
- Medical, dental, veterinary and pharmaceutical professions.
- The self-employed can continue to operate a business as normal, but it may affect ongoing credit or contracts requiring a credit check.
There are also some limitations on the types of debts which can be paid off via an IVA. Some are excluded from the arrangement, and others are likely to be refused by your creditors, who have to agree to the IVA before it’s entered into.
You will also face restrictions on your spending during the IVA period, and included assets may need to be sold to make repayments. So, it’s important to be realistic about the sacrifices you might be required to make when researching and discussing an IVA.
What debts can be included in an IVA?
An Individual Voluntary Arrangement will allow you to tackle most of the common debts causing issues in the UK. These include:
- Personal Loans
- Catalogue Debits
- Council Tax arrears
- Hire Purchase Debts
- Mortgage shortfalls
- Credit and Store cards
- HMRC debts, including income tax or National Insurance
Some of these debts will require the agreement of your creditors, which means they may not be included in your IVA. You should check with a debt advisor and an insolvency practitioner which of your specific obligations will be included in your IVA, and ensure it covers everything that you need to tackle.
If you discover an additional debt after your IVA has started, these are termed ‘unknown creditors’. The IVA is legally binding for these debts, so they can’t take any other action against you, and will receive some of your monthly payments. If they are unhappy with the arrangement, they have 28 days from the date they’re notified of the IVA to challenge it.
What debts can’t be included in an IVA?
Certain debts are either excluded from being paid via an IVA, or are likely to be turned down by creditors. The costs specifically excluded are:
- Student Loans
- Magistrates court fines
- Specific types of car finance, such as Leasing or Personal Contract Purchases (PCP). This depends on the specific contract with the creditors for your car finance.
- Child maintenance or Child Support arrears.
The cost of repayments for these debts can be included in your IVA allowance.
Mortgage and rent arrears and other secured loans against your property are technically allowed within an Individual Voluntary Arrangement. However, this requires your creditors to agree, and often they will decline.
Car finance will depend on your specific type of contract or agreement. Your creditors will want you to be able to commute to work and make your IVA payments. But some car finance providers will want to end your contract. And your insolvency practitioner may suggest that a valuable vehicle is sold to contribute to repayments when any finance agreements have concluded.
If your PCP agreement is allowed to continue, but ends during your IVA, you’re unlikely to be able to refinance it. Which means you may need to either find a relative able to loan you money to make the final balloon payment, or you might want to ask for a payment holiday before the contract ends to save for a cheaper alternative.
So, it’s important to assess all of your outstanding debts, collect all the relevant information, and get qualified advice before proceeding with a specific solution to make sure you understand clearly what will be included.
Does an IVA impact my credit rating?
If you’re struggling to meet your current financial commitments, then it’s likely your credit score is already being negatively affected. If you are currently being chased by debt collection agencies for missed payments you might already have Default notices on your credit file for these debts. If you have had a County Court Judgement (CCJ) made against you for an outstanding debt, this will also be marked on your credit file.
An Individual Voluntary Arrangement will be a further negative mark, but like other negative flags, it’s not permanent. It will be part of your credit record for six years from the date you enter into it, before it stops applying. If you already have defaults or a CCJ recorded on your credit file then your credit rating is already negatively affected for 6 years until they drop off automatically. Therefore, at this stage, contemplating this kind of financial arrangement, worrying about your credit score is almost an irrelevance.
By making your repayments and clearing your debts, you’ll improve your credit rating in the long term. When the IVA is first removed from your credit record, it may still be more difficult to obtain low interest credit, until you’re able to build up a good credit rating
During the period of the IVA, you’ll need to obtain written permission from your insolvency practitioner for any amount of credit more than £500. The only exception is to pay utility bills. Taking out new credit will also be more difficult due to your lower credit rating, so any offers available will incur higher interest rates and costs.
You can further lower your credit rating by making repeated applications for more credit. This is because every application will require a hard credit check by the potential lender, and these are recorded on your records for 12 months or longer. So, companies will assume you’re a higher risk.
If you use a service to look at your credit report, or check offers without actually applying, these will use a soft credit check, which aren’t recorded on your credit report.
What does living with an IVA look like?
Entering into an Individual Voluntary Arrangement can seem scary, as you’ll need to commit to a managed financial plan and budget. But along with removing the more stressful and potentially damaging problems of debt such as expensive repayments and stopping debt collectors harassing you, it’s also an opportunity to become more financially resilient and able to live without expensive debt in the future.
The starting point is to talk with an insolvency practitioner to decide how much you are capable of paying each month after covering your monthly bills and living costs. This financial evaluation will also look at your everyday expenses and any one-off costs or emergencies. For example, car MOTs and repairs.
From that point, your insolvency practitioner will deal with creditors. So, your role will be mainly to maintain your budget and keep on top of paperwork. And to ensure you inform your IVA supervisor if your situation changes during the arrangement period.
For example, if you then become unemployed, it doesn’t mean your IVA will automatically fail. Your insolvency practitioner can propose a payment holiday or an extension to the IVA term as long as creditors agree.
The flip side is that an increased or additional source of income will need to be disclosed, but you’ll retain some, or all, of it, depending on the amount. As part of the IVA, an additional income threshold of 10% will be set for you to earn without any additional IVA payment. Income over 10% would be split, with 50% going to your IVA.
If you don’t agree with the budget allowances, then it’s possible for you to speak to a different insolvency practitioner before you enter into an IVA. Expenses such as mobile phones, gym memberships, tv subscriptions and even newspapers can be taken into account as part of your budget.
You’ll also be subject to an annual review of your IVA, budget, income and expenditure.
Are you struggling to meet IVA payments?
If your circumstances change and you’re finding it difficult to meet the agreed repayments for your IVA, it’s important to inform your Insolvency Practitioner as soon as possible. There are specific time limits to let them know if you’re made redundant, for example, whether or not you expect a redundancy payment.
Your IP has the discretion to pause your payments, or lower them, without seeking the approval of your creditors. If your IVA began before October 2016, then the maximum payment holiday will be set at 6 months, but if it began after that date, you can have a break of up to 9 months.
A reduction of payments by up to 15% can also be implemented without needing your creditors to agree. If you do pause or lower your payments, then your IVA may be extended by up to 12 months. Any other proposal would need to be put to your creditors and requires the majority to agree. The rules regarding how IVAs are managed is set out in the IVA Protocol laid out by the Insolvency Service.
It’s also possible for a third party to contribute to your IVA, either supporting your monthly payments or by offering a final settlement. This won’t make them legally liable for your IVA or debts, and will need to be discussed with your Insolvency Practitioner.
Will an IVA impact my partner?
An Individual Voluntary Arrangement will allow your debts to be written off, not for your partner. Which means they will still be responsible for any joint debts you both have.
Their liability is increased if they are a guarantor on included loans for you, or if you opt for interlocked IVAs. As mentioned above, they can agree to contribute towards your IVA payments, without becoming legally liable for you fulfilling the arrangement.
During the application and evaluation of your finances, the income and expenditure for your whole household will be taken into account. So, they’ll need to share their financial information, but it’s unlikely to affect their credit score.
Lastly your new budget plan will obviously impact your everyday life, so it’s important to go through the proposed changes in detail and ensure that your partner will support your reduced spending and the potentially different lifestyle required during the IVA.
However, the significant reduction in both personal stress, and financial pressure, can have a big positive effect on your relationship and family life.
What does an IVA mean for my bank account, savings and pension?
You can continue to use your bank account as normal during an IVA. You don’t need to tell your bank about the arrangement.
If your bank is one of your creditors, or linked to the company you owe the debt to, then you may need to set up a different account with a new provider. This is because a bank could be able to automatically take money from your account to cover any unpaid debts under something called the “Right to Offset.”
Banks are expected to take check if you’re in financial difficulty, and you can claim money if you believe they’re not following the “Right to Offset” rules. But it’s easier to avoid the issue in the first place by switching to a new basic bank account with no overdraft.
Savings you have will usually be included in your IVA. They’ll either be used as a lump sum payment, or utilised for your monthly repayments. Once you’ve entered into an IVA, you’re allowed to keep any savings that come out of your agreed living expenses budget, and these don’t have to be declared or paid into your IVA, which is a good idea to cover unexpected costs. Or to cover holidays and seasonal spending.
The important thing is that you save for any expenditure, and don’t take out any additional credit or loans.
If you do start making substantial savings, you could provide a cash lump sum to settle an IVA earlier. Making higher payments won’t reduce the terms of your IVA, you’ll just end up paying more of the original debt.
Although an annual review may lead to increased payments if your income has grown, it will also take into account any rise in expenses. Your insolvency practitioner has the discretion to reduce your payments by up to 15% without requiring creditors to agree, if your legitimate costs have gone up – for instance rent, council tax, or utilities.
Pensions are taken into account as part of your IVA calculations, whether they are personal, occupational or state pensions. If you receive a lump sum from your pension, you may need to agree to pay this into your IVA.
If you’re under 55 during the full term of the IVA, then your pension will be secure. It will only come into question if you are reaching the age when you can be granted access to your entire pension amount – or at least part of it.
Those over 55 who have a ‘defined contribution pension’ and haven’t started withdrawing money shouldn’t be expected to access it for an IVA. The Welfare Reform and Pensions Act of 1999 states that if you become insolvent, your pension is an exempt asset. If you do decide to utilise any pension amount to pay off your debts as a personal choice, it could mean your creditors get access to the rest of your pension amount. This makes it vital to get advice from a financial adviser before using any pension money to pay off debts.
If you’re paying money into a personal pension, you may be asked to stop during the period of the IVA to direct that money to your creditors instead. The most likely outcome will be that you’ll need to reduce your payments to the minimum during the period of your IVA, unless you’re close to retirement, when reasonable payments may still be allowed.
But due to the flexible nature of an IVA, there are always possibilities to tailor the arrangement to your individual requirements by speaking to your insolvency practitioner.
Does an IVA affect my home or ability to get a mortgage?
If you own your home, it’s possible to keep your property out of an IVA, but it’s extremely unlikely. It’s worth checking with your insolvency practitioner, particularly if you have any unusual circumstances.
The value of your house will be taken into account for your IVA. In the final year of the agreement, you’ll need to have a valuation of your property. This will establish how much equity is in it, which is the money you’d make from a sale after any remaining mortgages are paid off.
If this shows more than £5,000 equity, you will normally need to remortgage your home to raise a lump sum for the IVA. But this shouldn’t require you selling your home, and there’s a limit on the amount you’re expected to raise. This means you won’t normally be required to re-mortgage if it will extend beyond the existing term or the state retirement age.
If you can’t re-mortgage, or it would be too expensive, you may need to make extra monthly payments into your IVA, increasing the term by 12 months. But this shouldn’t mean taking on any extra debt to pay off the additional amount.
New mortgages are unlikely during an IVA. Any credit more than £500 will need written approval from your IVA Supervisor, and finding a lender is likely to be extremely difficult.
When your IVA has ended, you will have a better chance of finding a reasonable mortgage offer. Some lenders will refuse any applicant who has ever had an IVA, while most others might only offer a mortgage after the IVA has disappeared from your credit report.
However, a number of lenders will consider mortgage applications as long as your IVA is at least three years old, fully settled, and you have rebuilt your credit history. You may need to agree to provide a larger deposit as a result.
If you are currently renting a property, then an IVA shouldn’t affect your ability to stay in your home.
When you start an IVA, your landlord or property agency won’t be informed. And if you’re already renting, then you won’t be subject to a credit check, and it’s highly unlikely that anyone will check the public IVA Register. So as long as you budget properly and continue to pay your rent on time, you should have nothing to worry about.
If you’re intending to continue renting the same property for the duration of your IVA, the only thing that may change is if you have an increase, or decrease, in your rent charges. This will need to be taken into consideration for your IVA payments, which could be raised or lowered as a result.
Rent arrears from a previous property you no longer live in are no longer a priority debt, and become the same as an unsecured debt.
Renting a new property is likely to be much trickier under an IVA. Debts may have already affected your credit rating, and your arrangement will also have a negative impact. Most letting agents will run a credit check during your rental application, so this will be an issue.
There are some options to try if this becomes an issue. You might be asked to pay a larger deposit or offer 6 months rent in advance, but this is unlikely to be possible if your financial situation has led to an IVA. But you could look to a friend or family member to either cover the amount, or to be a Guarantor who would be legally responsible for paying the rent if you’re unable to do so.
A poor credit rating doesn’t usually affect your rental if you’re applying to a Council or local Housing Association property.
How much does an IVA cost?
There are fees and costs involved in an IVA in addition to the money you agree to repay to your creditors. The actual amounts will vary between different IVA companies, along with when they will need to be paid. This should be made clear before you enter into any agreement, and you should check and understand all fees and charges before proceeding.
The typical costs are:
- A nominee fee.
- A supervisor fee.
The nominee fee is the cost for putting your IVA proposal to your creditors. For example, it could come to the first 5 IVA payments, or £1,000-2,000.
The supervisor fee covers the on-going costs. And will be a percentage of your IVA amounts, for instance 15-20%.
Disbursements are other expenses paid to third parties, including insurance to protect any money you’ve paid, system maintenance fees, a fee to register the IVA with the Insolvency Service, any legal fees specific to your case, and costs for property valuations and land registry fees. This could typically amount to around £1,200 in total.
The good news is that all the costs are outlined in advance and taken from your monthly payments. So you shouldn’t have any unwelcome surprises.
What are the advantages of an IVA?
There are many reasons to consider applying for an IVA as a debt solution.
- No upfront fees
- One regular, smaller monthly payment
- Interest and charges on your debts are frozen by law
- Unsecured creditors can’t take further action against you
- Debt collectors and agencies cannot chase you any more for payments
- You won’t be forced to sell your home
- All remaining included debts will be written off (up to 90%) at the end of your IVA
What are the disadvantages of an IVA?
It’s important to understand the potential disadvantages of an IVA before choosing the right debt solution for your individual circumstances.
- You’ll need to stick to your agreed budget and spending restrictions during the IVA.
- An IVA needs to be approved by your creditors, and not all debts can be included.
- Homeowners may be required to either re-mortgage during the final year of an IVA, or make payments for an additional 12 months.
- Any unexpected financial windfalls of more than £500 during the IVA will need to be introduced into the arrangement
- Income increases above your agreed 10% threshold will be split, with 50% going into your IVA payments.
- If you fail to make the payments due, or your circumstances change and creditors refuse to accept any amendments, then your IVA may fail.
- Your IVA will be recorded on the public Insolvency Register, and remain on your credit file for six years after being accepted.
- You may have to pay a larger amount, and for a longer period, than with other debt solutions such as bankruptcy
How is an IVA managed?
Once creditors have agreed to an IVA, it becomes legally binding, and a court will appoint your insolvency practitioner to become your IVA supervisor.
Your IVA supervisor is responsible for making sure your creditors receive payments on time as set out in the arrangement. They’ll also handle all contact with your creditors, although you will probably still receive annual statements directly.
During an IVA, you will be responsible for ensuring your contributions are paid on time without fail. Missed payments could result in your IVA failing. And you’re also expected to maintain all the necessary paperwork, including for your annual review.
Any changes in circumstances should be reported to your insolvency practitioner straight away, including if you move home, switch jobs, or your financial situation changes. Although you are able to earn some additional income and accept small financial amounts as outlined in the IVA, it’s always better to check with your IVA supervisor to avoid any issues.
Following your annual review or any significant changes to your finances, your IVA supervisor will handle any discussions with creditors to amend payment amounts or resolve any other issues as positively as possible.
This includes if you discover any additional unsecured debts after your IVA has started, or if you want to cancel your IVA if you can’t pay any more money, or you can repay a larger amount using a different solution. If you are contacted by a creditor about an existing debt which isn’t included, your IVA supervisor can add it within the legally binding terms. Alternatively, if you don’t think you owe the debt, you should inform your insolvency practitioner that you want to challenge it.
Will an IVA work for me?
It’s impossible to say whether an IVA will work for a specific individual without knowing all the details involved. This is why it’s so important to do your research, speak to an experienced debt advisor, and ensure you know what options are available for you to take control of your financial situation.
If you can afford some monthly payments, but not the full amount to make a decent contribution to reducing your debts, then it’s an option certainly worth considering.
Especially if you own your own home, or run your own business. Some options, such as bankruptcy can mean your house may be sold. If you’re renting, then some tenancy agreements include a clause to terminate the agreement if you go bankrupt. Obviously if you’ve failed to pay your rent and run up arrears, this can lead to an eviction.
You usually won’t be able to either run a company, or act as a company director, whilst bankrupt. Which means an Individual Voluntary Arrangement or debt management plan are important to consider if you want to continue in either role.
An IVA is one of the more flexible debt solutions which will be tailored to your personal circumstances. Unlike a debt management plan, it’s a legally binding solution, so you don’t need to worry about creditors taking action directly against you as long as you make the monthly repayments.
Are there different types of IVA?
There are a few different types of IVA available to suit different circumstances.
- Self-Employed – Similar to a normal IVA. But this includes more flexibility to cope with seasonal changes in income, business credit to continue running your company during the agreement, and excluding trade creditors if including this debt might severely impact an ongoing business relationship which is required to continue trading.
- Joint-IVAs – Technically these are two individual IVAs which are ‘interlocked’ to allow a household to make one affordable payment to the creditors of both partners in a relationship. Joint debts will be included in both arrangements, and the two IVAs are administered as one, once they’ve been accepted by creditors.
- Full and Final IVAs – This allows you to offer a one-off payment to creditors as a full and final settlement. The money can come from savings, the sale of an asset, or funds from a friend or family member. This means you can clear the debt and IVA much more quickly.
Can an IVA be cancelled or ended early?
If your circumstances change and you’re able to make a large lump sum payment, it’s possible to end your IVA earlier than agreed. Alternatively, if you’re unable to continue with repayments, or have another method to make larger payments to your creditors, then you can ask to cancel your IVA.
To complete an IVA with an early settlement, you’ll need to propose an offer via your insolvency practitioner. If they feel it’s reasonable, then it will be put to your creditors for agreement.
Ending an IVA early will need you to typically offer an amount as close to what’s owed as possible. This may differ depending on your IVA provider and creditors, but if you currently pay £200 per month and have 24 months left, a sensible offer would be around £4,800.
You’ll also need to explain where the money has come from, as most windfalls would normally have to be paid into the arrangement in full. So, the money for an early IVA settlement would usually come from friends or family as a gift.
The main exception is if you are made redundant. In this case it can be worth offering a lower sum, although this may be rejected. If your offer is accepted, then usually creditors will settle for part of your redundancy money (for example if you’re unlikely to get a new job), and let you keep around 3 months living expenses.
An IVA can also be cancelled. This will also need to be arranged via your insolvency practitioner. One reason for creditors agreeing to a cancellation include if your circumstances mean it’s unlikely you can make any more payments, due to long-term illness or a similar change in situation.
Another reason to cancel an IVA is if you can show creditors it’s possible for you to make more repayments via other options.
If a cancellation is agreed, your insolvency practitioner will fail the IVA.
If your creditors don’t agree, then you could also stop making payments, which will breach the terms and conditions of your IVA, also causing it to fail. In this case, you’ll still need to make arrangements without creditors to pay your full debts, and pay any outstanding fees for your IVA management.
The risk of cancellation without any agreement is that both your IVA supervisor or creditors could now choose to make you bankrupt without serving you a ‘statutory demand’ to warn you. Your failed IVA would be taken as sufficient grounds for their actions, and then your home, business etc would be potentially at risk.
Ultimately, an Individual Voluntary Arrangement is just one of a number of ways to tackle debt issues. So it’s important to look through and understand all of your options, including everything we’ve covered at DebtBuffer. This means you can then speak to financial advisors, insolvency practitioners or other debt organisations with a better idea of the best route forwards.
The worst option is to try and ignore your debts, or letting yourself become paralysed through stress and fear.
By taking the first steps you can buy yourself valuable time to get more advice. This can be achieved using the DebtBuffer letter writing services, or going through the initial steps of debt solutions, such as an Interim Order. By taking some small steps to act and regain some control, you’ll be able to give yourself valuable time and space to focus on a more permanent solution.