IVA Questions and Answers

What is an IVA

Introduced as part of the 1986 Insolvency Act, an IVA, or Individual Voluntary Arrangement, is a formal debt solution designed to act as an alternative to bankruptcy.

It enables a person with a serious debt problem an opportunity to reach a legally binding agreement with their creditors that revolves around affordable payments being made for a fixed term, which is normally 5 years. Once all the payments have been made and the fixed term is successfully completed, all outstanding balances on the original debts are legally written-off.

Whilst the IVA is in force, creditors are legally obliged to stop charging any interest on the outstanding debts, cease adding late payment charges to the balances and refrain from taking legal action against the IVA applicant.

This ensures that once the IVA has successfully completed the applicant is completely debt free.

How long does an IVA last

Contribution IVA

In the vast majority of cases an IVA will have a fixed term of 5 years or 60 monthly payments though, technically, there isn't an actual prescribed term. In recent years and as part of the IVA protocol, creditors has insisted that the 60 month term can be extended by 12 extra months if there is a property with equity that needs to be considered as part of the arrangement. A full explanation of this aspect of an IVA will be given during your IVA consultation.

Lump Sum IVA

An alternative type of IVA can consist of just 1 payment. In this type of IVA the agreed funds are passed to the Insolvency Practitioner to acts as a full and final settlement of all the unsecured debts in one go. These types of IVA are far less common and are known as a Full and Final IVAs or Lump Sum IVAs.

Who can be helped by using an IVA

An IVA is available to anyone living in England, Wales or Northern Ireland who are experiencing a serious debt problem and want to avoid bankruptcy. They also need to have unsecured debts above £10,000 which should be owed to at least 2 different creditors. They must be able to afford payments to their creditors after their modest living allowances have been deducted from their income, the size of the payments being related to the actual size of the debt. The higher the debt, the higher the monthly payments.

People living in Scotland have an alternative version of an IVA which is known as a Protected Trust Deed (PTD) A PTD is similar to an IVA but varies on some aspects, for example having a normal duration of only 3 years.

What does an IVA cost each month

If you enter into an IVA you will be expected to repay what you can afford and, so long as this is above the minimum payment level for your size debt, you will be able to enter into an IVA. The minimum payment level is calculated in ratio with your outstanding debts, the more you owe, the more you'll have to repay.

Most creditors are willing to accept you will not be able to repay your debt in full within 60 payments. In fact, they will accept a fraction of your total debt if it can be proved that is all you can afford.

Can I force my creditors to agree an IVA

No, an IVA is a voluntary arrangement for all parties, including your creditors. If they don't want to accept your proposal they have the right to reject it at the creditors meeting.

That said, your creditors are unlikely to refuse a well drafted proposal that demonstrates clearly the offer being presented is a better return than the alternative of bankruptcy. With this in mind, most IVA proposals highlight the comparative returns between an IVA and bankruptcy to emphasize this very point.

Can I continue to run my business if I enter an IVA

Creditors will be quite happy to allow a person to continue trading as a 'Sole Trader', in a 'Partnership' or as a 'Limited Company Director' whilst in an IVA.

Creditors recognise it's in their interests for the IVA applicant to be earning a living, otherwise making repayments would be impossible. Creditors have neither the time nor the interest in interfering with the running of your business. They will instead be happy to leave that to you.

Does an IVA affect credit rating

Yes, an IVA will definitely effect your credit rating.

Under the terms of your IVA you will be expected to voluntarily refrain from entering into any loan or credit agreements for the duration of your IVA. But your credit rating will be effected for a duration of 6 years, so there may well be a period of 12 months during which you are completely debt free, yet unable to raise any credit due to your rating. Once the 6 years have passed from the beginning of your IVA you will find your credit rating will slowly recover.

What if I default on my IVA payments

If you are unwilling to continue making payments into your IVA, your IVA will default after 3 missed payments. If you decide to default on your IVA without discussing it first with your IP, you could face the prospects of being made bankrupt.

However, if you are unable to maintain your IVA payments due to a change in your circumstances, such as unemployment or illness from work, under the terms of the IVA protocol it is now possible to take a 6 month payment break during your IVA. The break will be granted at the discretion of your IP and any missed payments will be added to the original term of your IVA, extending the term accordingly.

If you experience payment difficulties due to a fall in income rather than a complete income loss, your IP has, at their sole discretion, the authority to lower your monthly IVA payments by as much as 15%. This facility was also introduced as part of the IVA protocol with the aim of introducing more flexibility to IVA payments and so enable more people to successfully complete their IVAs.

When my IVA is completed what happens next

When you have successfully completed your IVA payments you are legally Debt Free and you are free to begin the process of rebuilding your creditworthiness.

You will need to inform the credit reference agencies that your IVA has completed successfully and you will need to ensure that your name is removed from the Insolvency Register.

If I set up an IVA will I be made to sell my house

No. An IVA protects your home and the equity within it. This is one of the major advantages of entering into an IVA for people who own property.

The IVA provides a framework under which part of the equity in your home may be introduced to the benefit of your creditors. But if circumstances prevent you from releasing your equity as scheduled, the IVA is extended for 12 months in lieu of the equity and the property remains untouched.

Will I have to surrender all my assets and valuables

If you have savings, own shares or contribute towards an endowment plan, have a holiday home or a caravan or any other luxury item of value, they will need to be assessed as part of the IVA process. In most cases these items will form part of the agreement and would need to be introduced to the IVA, although exceptions can be made under mitigating circumstances.

Second properties which are being purchased under a 'Buy to Let' style mortgage are the exception to this rule. Most creditors do not object to an IVA applicant owning more than one property, so long as the property concerned is being rented out profitably and the profit is being declared as part of the applicant's income. If this were the case, as with the primary home, the rented property would be subject to the equity clause.

What if I receive a financial windfall

When you enter into an IVA you give your creditors a legally binding promise to repay as much of your original debt as possible within the term of your IVA. In return they are legally obliged to write-off whatever you can't repay at the end of the IVA.

Therefore, if you experience a financial windfall during the term of your IVA, you are legally obliged to inform your IP and introduce 100% of the windfall to the IVA for the benefit of your creditors. If the windfall is large enough to completely repay your original debt, you may also be expected to repay the costs of the IVA too. If the windfall is insufficient to clear all your debt, the IVA will continue as before.

The exception to this is when the windfall comes as a result of a redundancy payment. Your IP can allow for some of the redundancy payment to rest with you in order to supplement your income whilst you look for a new job.

Will an IVA impact my life style

By the time most people enter into an IVA they have already tried to limit their personal spending habits and have already had to make genuine personal sacrifices along the way, reducing their expenditure wherever they have been able. So, for most of these people, and IVA will offer an improvement in life style, by enabling them to redress the imbalances in their budget.

But, for those people who have resisted the need to moderate their spending, an IVA budget will be a challenge.

IVAs repayments are based on affordability, once an applicant's modest living costs have been deducted from their income. But what constitutes 'modest' is a matter of opinion and expending large amounts of money on socialising is unlikely to go down well with the creditors so, for some applicants, a reality check will be needed.

Can I pay off my IVA early

Yes, there are circumstances where you may have a chance to bring your IVA to an early close.

As mentioned earlier, if you have a large enough windfall you may be able to repay all your debts early and bring the IVA to a close like that. Otherwise you could introduce 3rd party funds to the IVA as a means of a 'Full and Final Settlement.'

Creditors like the idea of having a large payment ahead of schedule, so 3rd party funds are a great way to entice them into bringing the IVA to an early close and releasing you from the IVA.

Does being on Income Support stop me from applying for an IVA

Unfortunately, in order to qualify for an IVA, you must have an income which is not based solely on benefits. If your income is completely Income Support or benefit based you will need to wait until you have found a stead job before you apply.

If you are hoping to enter into a Joint IVA with your partner and only one of you is receiving Income Support, then you would be able to apply for an IVA but there would, of course, be a reassessment of your circumstances undertaken once you were earning a steady part time or full time income.

I'm a professional and bankruptcy is not an option for me. Can I do an IVA

IVAs were originally introduced as part of the 1986 Insolvency Act and were specifically aimed at offering an alternative formal debt solution for those people to which bankruptcy was prohibited.

With this in mind, any Armed Service Personnel, Police Officers, Prison Officers and any other civil servants whose profession prohibits bankruptcy, have the option of proposing an IVA as an alternative to bankruptcy and the professional ramifications that would bring.

This is also true for other professionals working within the Legal and Finance sectors. Accountants, IFA's, Mortgage brokers, Bank employees, Lawyers and Solicitors can all apply for an IVA should the need arise.

Whilst an IVA is regarded as being a private arrangement between the applicant and their creditors, it is still a formal process which is recorded on the public Insolvency Register. It would therefore be advisable for any professional to approach their regulatory body or human resources department to ascertain the full impacts an IVA may bring to their professional status.

Do Insolvency Practitioners undertake IVAs for free

No, this is a myth. There are no Insolvency Practices that work for free.

Even the Insolvency Practices that represent the charitable organisations, such as the 'Citizens Advice Bureau', 'Payplan' or 'The Consumer Credit Counselling Service', charge for their work.

So who pays the Insolvency Practitioner's fees

The creditors do. The creditors negotiate with the IP at the creditors meeting to establish what fees the IP will be allowed to retain out of the IVA contributions made by the IVA applicant.

The IVA fees are paid out of the money being paid back to the creditors and do not have any impact on the amount of money the applicant is expected to repay as these payments are capped to what is deemed as affordable and no more.

The exception to this rule would be if the applicant was to receive a financial windfall during the IVA. If this happens the creditors would expect the outstanding debts to be fully repaid and any outstanding fees to be covered by the applicant before the IVA could be brought to a successful conclusion.

What could cause my IVA to fail

There a many reasons an IVA could fail, but highest on the list would be unexpected changes of circumstances.

Obviously this covers a multitude of possibilities, but redundancy and illness are not uncommon. The loss of an income, however it may come, will be a defining point in any IVA. Without the ability to earn an income the IVA will more than likely be unsustainable.

With the introduction of the IVA Protocol there are now some significant improvements in the flexibility of IVAs aimed at helping short term payment problems, and payment breaks can be given for up to 6 months when necessary. But in cases experiencing a permanent loss of income the likely outcome will be a failure of the IVA.

How many IVA's can I have

Technically there can only be one active IVA in force at any one time, however, once an IVA has run its term, there is nothing to stop the applicant from entering into another IVA straight away. Therefore, in theory a person could enter into an IVA every 5 years.

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