Between April and June 2021, there were a total of 27,662 individual insolvencies in England and Wales; 20,910 of them were Individual Voluntary Arrangements (IVAs). Whilst the total number of insolvencies had dropped, there has been an increase in IVAs. Yes, the figures are shocking and represent the struggles many people have gone through over the past 18 months due to the Covid-19 pandemic. Agreeing an IVA with a creditor has enabled many to manage their debts more efficiently and get back on their feet. But what is an IVA? How does it work, and is it the right solution for you?
What is an IVA?
In a nutshell, an individual voluntary arrangement, or IVA, is a legal agreement between you and your creditors to pay back your debts over a specific period of time. It must be set up by a qualified legal professional proficient in debt consolidation, usually an insolvency practitioner (IP); the court must approve it, and you and your creditors must stick to the arrangement.
Criteria to apply for an IVA
An IVA is a flexible means to manage your debt, but it is not suitable for everyone. There are certain criteria to be met:
- Your level of debt must be £10,000 or more to make an IVA financially viable. Whilst you can arrange an IVA if your debts are lower, the fees may be higher, and therefore a Debt Relief Order (DRO) may be more suitable.
- You must have at least two separate creditors.
- You don’t want to liaise with your creditors directly.
- You have sufficient ‘spare’ income, i.e., money left over after all your essential bills are paid, to be able to make a payment every month.
Whilst you don’t have to meet all the above criteria, you are more likely to be accepted for an IVA if you do.
How an IVA works
An IVA works by stopping your creditors from taking further legal action and freezes your debts, i.e. no more interest will be charged. Your IP will assess your affordability to pay a monthly sum to an IVA by assessing your income and expenditure and consider whether your regular long-term income is sufficient for the duration of the IVA, which is usually 5 or 6 years.
The IP will take your IVA proposal to your creditors and liaise with them on your behalf. At least 75% of your creditors must agree to the IVA for it to be approved. Within the IVA will be the amount you have agreed to pay each month to your creditors. You pay just one amount to your IP, and they will distribute the payment between your creditors for you.
When you and the other parties have signed the IVA, it becomes a legally binding agreement. If you don’t keep up repayments, the IVA can be terminated by the IP, and your creditors are then legally allowed to seek repayment of their debt in another way.
Advantages of an IVA
There are several advantages to an IVA, including:
- You will be able to make one affordable payment per month over a long period of time, rather than several payments per month over a shorter period of time.
- If you are a homeowner, you are unlikely to lose your home (except for any potential equity) as long as you keep up with mortgage repayments or any secured loans on the property.
- There are no fees to be paid before you have agreed your IVA. Any fees set by your creditors during the IVA will be included in your monthly payments.
- If you can, you can make a one-off ‘full and final settlement payment to your creditors, if they agree and through your IP, to complete the IVA.
- Once you have made your final IVA payment, any remaining unsecured debt is written off, and your creditors are not allowed to seek any further repayments.
Disadvantages of an IVA
However, there are drawbacks to taking an IVA, including:
- If there is equity in your home, you will likely need to remortgage your property to raise funds to pay your debts, which could result in a higher interest rate.
- If you cannot re-mortgage, you will have to make a further 12 monthly payments.
- If you fail to keep up payments on your IVA, it will fail, and your creditors are likely to request that your IP cancels the IVA. Your creditors are then allowed to petition for your bankruptcy.
- Your credit rating will be seriously affected, and you may not be able to get a loan or any other form of credit.
- Your creditors may not agree to your IVA proposal.
- Once your IVA is completed, only your unsecured debts are written off. Any secured debt is not included and will remain outstanding.
- Your IVA will be recorded on the England and Wales’ public register.
- You may find it difficult to keep your bank account and have to open another bank account that doesn’t allow you to have an overdraft, credit card or any other credit facility.
How does an IVA affect your life?
Taking out an IVA will, without a doubt, affect your life in several ways.
With most jobs, having an IVA will not affect your role, but if you work in law, accountancy or financial services, your job may be affected if you take out an IVA. You may find that you are no longer allowed to practice or only work as long as you adhere to certain restrictions.
Your possessions and assets
An IVA will not affect your home or items you use in your home, such as white goods. However, if you own other expensive items, like jewellery and antiques, or a car, land, or property of significant value, your IP may well ask you to sell these possessions to pay a sum towards your debts. Anything that you agree to sell with your IP will be put into the IVA agreement. Anything that you want to keep, like your car, can be excluded but only with the agreement of your IP and creditors.
Any future income/assets
While the IVA is active, usually 5 or 6 years, any additional income or assets you receive, i.e., from an inheritance, a bonus from work or a house move or even PPI refunds, the money must be declared to your IP and paid into the IVA. This is covered under a windfall clause that most IVAs include, so if you think this may happen over the IVA period, think carefully before agreeing to it.
Whilst your home is protected from the IVA in that it can’t be sold, if the value of the equity in your home is above £5,000, your IP may well ask you to re-mortgage the property and use the equity to pay off some of the debt. But you do not have to sell your home, and if you can’t re-mortgage, it is usual to continue to pay the monthly instalment for a further 12 months.
The IVA Protocol
This is a government protocol regarding IVAs that all insolvency practitioners must follow when setting up and managing an IVA. The IVA Protocol is a voluntary code of practice that every IP and many creditors have signed up with. The protocol sets out a standard approach to arranging and IVA that ensures the processes are clear and fair, which includes:
- The content of the proposal.
- How your income and expenditure are assessed.
- How any equity in your home is dealt with.
- What terms and conditions are included in the IVA.
Does it cost to apply for an IVA?
Because an insolvency practitioner (IP) must set up an IVA, you will have to pay their fees. This varies according to the IP you choose, but they average around £5,000. Some IPs will ask you to pay their fees upfront, but most will incorporate their fees into the IVA and take a proportion of your monthly payment to go towards paying them.
The IP’s fees cover their role as:
- Advise on whether an IVA is the right option for you.
- Nominee in putting together your IVA proposal, submitting it to your creditors, negotiating the agreement, and applying to the court for IVA approval.
- Supervisor in collecting your regular monthly payment and distributing it between your creditors in accordance with the agreement, including taking a proportion for their fees. They will also act as your point of contact if there are any changes to the IVA.
- If you think an IVA is the right option for you, first and foremost, make sure you seek professional advice.