17 Nov (Almost) Everything you need to know about an IVA
Millions of people all around the world are in debt. Sometimes it is very manageable, but sometimes it can be a real struggle. In England, Wales and Northern Ireland, there is a formal, legal solution called an ‘IVA’, which is designed to help you if you are one of the people who need a bit of help. There is an alternative, called a Protected Trust Deed, in Scotland.
This guide will tell you all the essentials you need to understand if you are considering using an IVA to help with your debts. But, if you want more information, and to become a true IVA-expert, you can try this website to find out more.
What is an IVA?
An ‘Individual Voluntary Arrangement’ is a debt solution which allows you to consolidate all your unsecured debts into one, affordable payment, without needing to take out another loan. You work with a qualified professional called an Insolvency Practitioner to come up with an agreement across 5 or 6 years. After this period, any remaining debts will be written off. This could be as much as 70% of your debts!
How does it work?
- Step One: You and your IVA provider work together to understand exactly how much you earn, and how much you spend, every month. They will take into account any income you have, and make sure you will have enough to pay your rent or mortgage, utilities, food, clothes, and many other necessities. The money which is left over is the money you can offer to your creditors.
- Step Two: A proposal is made to your creditors. The proposal outlines how much you can truly afford to pay them, and how this amount will be divided amongst them. The creditors can then accept, or reject, the proposal. Not all your creditors need to accept the proposal. But, it needs to be accepted by enough creditors to cover 75% of the value of your debt. Once they agree, all your creditors are bound by the IVA, even if they voted against it.
- Step Three: When your IVA is accepted, the agreement begins. All you have to do is make sure that you are paying the agreed amount to your IVA provider, and they will distribute it amongst your creditors. Your creditors will no longer be able to legally contact you. Your creditors may negotiate other things into your agreement, but you have 14 days to accept or reject those additions. If you own your home, your agreement may involve you remortgaging your home in order to release its equity in your final year. However, it is possible to have a 6th year of payments in lieu of this.
What makes an IVA such a great option?
An IVA is a fantastic solution for your debt problems for a huge variety of reasons, but most of all:
- Your creditors will no longer be allowed to contact you. When your IVA begins, all their communication must be with the IVA provider. If they contact you, call your IVA provider to complain.
- Your interest and charges are frozen. This means your debts will not grow while you are paying off your debt.
- You can have part of your debt written off. If your debts aren’t fully paid off after the agreement is completed in either 5 or 6 years, then the remainder is written off! This can be as much as 70%.
- You only have one payment to make. Instead of making lots of payments of different amounts to different creditors, with different interest rates, which can get complicated and stressful, you pay your IVA provider your one, affordable payment. It is then their job to distribute it amongst your creditors.
- It won’t cost you any extra, upfront fees. Some debt solutions require payment to the provider. However, the cost of setting up and maintaining your IVA is taken from the monthly payments.
- You will never have to lose your home as part of the IVA. This is one of the scariest parts of the idea of Bankruptcy for many homeowners who are in debt. The idea that they will probably lose their home as it is sold by their Official Receiver to pay their debts, is terrifying. Although, you may have to release its equity, you will never have to sell your home.
Is the IVA perfect?
We won’t lie to you and tell you that IVAs are perfect for everyone. Like everything, there are drawbacks to using an IVA:
- Not all your debts can be included. Only unsecured, so if you are mostly struggling with secured debts, tax arrears, mortgages, student debt, or other debts then it may not be for you
- Any windfalls you receive above the value of £500 will go into your Arrangement. If you are expecting a large inheritance, or any other form of large lump-sum income, then an IVA might not be the ideal solution for you at this moment.
- You are recorded on the Insolvency Register. This includes personal details, such as your name and address. If you believe that publically publishing your address could put you in danger then you can petition to have this removed, but all your other details will be available for anyone to search and see.
- Similarly, your IVA is recorded on your credit file for 6 years from when it is accepted. This is essentially the length of the IVA, but it can affect your ability to take out further credit while you are in the IVA.
- As well as this, taking out loans greater than £500 require the approval of your Insolvency Practitioner. Generally, if you think that you are going to need to take out more credit to get-by, then you may not be ready for an IVA.
What is life like with an IVA?
Once you have your IVA, hopefully, your quality of life should improve. Your creditors should stop calling you and knocking on your door, and having a set monthly payment should let you budget much more effectively.
In terms of maintaining your IVA, you will be required to participate in an annual review. This will require you to submit documentation, such as bank statements and payslips. Payments into your IVA can go up, or down, and this documentation will help decide if your circumstances have changed.
However, it is also important to tell your IVA provider when you circumstances change, rather than waiting for the review. This is because you may end up with back-dated extra payments to make if, for example, it turns out you got a promotion in February, but your review was in November. That would be 9 months of catch-up payments that you would be expected to make, which could be very difficult if you have already spent the money.
Generally, it is important that you keep your provider up-to-date with all financial changes in your life. This might be moving house, discovering further debts, or having a child. It may not always be possible, but monthly payments could be reduced if your circumstances change and you are struggling once again.