If you’re struggling with unaffordable debts in the UK, an Individual Voluntary Arrangement (IVA) could be the solution you’re looking for.
IVAs are a formal agreement between you and your creditors that allows you to make reduced monthly repayments over a set period of time. After this time, any remaining debt is written off.
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement, or IVA, is a legally binding agreement between you and those you owe money to that allows you to pay off a portion of your debt over a fixed period of time – usually five years.
Designed as a way of helping people avoid bankruptcy, IVAs are available to those living in England, Wales and Northern Ireland.
If approved, all interest and charges will be frozen on the debts included, protecting you and your home from any legal or enforcement action.
Lenders that are included are also unable to pursue you for any outstanding amounts for the duration of the arrangement.
Your payments will be based on what you can afford to pay and once you have completed the arrangement, any remaining balances will be written off.
What will an IVA cost me?
Regardless of what company you set up your IVA with, there will generally be costs and fees included.
However, these are usually built into your monthly payments and you are not required to pay these upfront.
When you enter an IVA, your lenders are, put simply, agreeing to receive a lesser amount in order for your Insolvency Practitioner (IP) to be paid to administer your arrangement.
The advantage of working with an IP is that they’re trained debt professionals who will take care of your payments for you.
Their fee will be deducted from your monthly contribution, which simplifies the process and allows you to focus on one affordable payment.
How long does an IVA last?
IVAs typically last for 60 months (five years). However, if you own your home this could be extended for a further 12 months depending on the level of equity and if it can be released.
It can also be extended in light of reduced or missed payments. This can range depending on your circumstances.
In cases where someone has been given a ‘windfall’, which is an unexpected large sum of money such as inheritance, gifted money or a lottery win, then this could be used to end your IVA early. However, this will be dependent on the amount of money as the sum needs to cover your full debt level as well as fees.
Is an IVA worth it?
Whether an IVA is worth it or not will depend on your individual circumstances.
We can equip you with all the necessary information, but the final decision will ultimately be up to you.
An IVA could be the answer to all your debt problems, but that doesn’t mean it doesn’t come with risks.
We always advise seeking professional debt advice when deciding how to deal with your debts and to get as much information as you can before choosing the option that works best for you.
IVA advantages and disadvantages
There are pros and cons to almost everything in life – including an IVA. As such, we’ve listed these below for you:
Advantages of a IVA – Individual Voluntary Arrangement
- IVA payments are affordable and tailored to your financial situation.
- You’ll enjoy legal protection from creditors and interest and charges will be frozen.
- The arrangement allows you to protect assets like your home and car
- Remaining debt will be written off at the end of your payment terms
- Flexible solution that can adapt to changing circumstances during the arrangement.
Disadvantages of a IVA – Individual Voluntary Arrangement
- IVAs affect your credit rating for six years, making borrowing more difficult.
- Possible extension of the arrangement if you own a home with available equity.
- Restrictions on obtaining credit without Insolvency Practitioner’s permission.
- Annual reviews and monitoring will take place during the IVA period.
- Responsibility for updating IVA status on credit file falls on you.
Will an IVA affect my credit rating?
Unfortunately, if you enter an IVA it will affect your credit rating. This is because your arrangement will be noted on the Insolvency Register, where it will stay until it has been completed.
This will then be put as a marker on your credit report for a total of six years (a year after you have finished the IVA), which will bring your score down.
However, when you look at this in context, your score will already be on the lower end of the scale from being in debt in the first place, especially if you have been defaulting on payments.
How long does an IVA stay on your credit file?
An IVA is noted on your credit file from the point of approval, where it will stay for a total of 6 years – a year after you have completed the agreement.
If you finish your IVA early, it will still show on your file until the 6 years has passed, but it will be marked as ‘complete’ or ‘settled’.
The only exception to this is if your agreement is terminated – in these cases it will show on your file as failed.
What debts can be put into an IVA?
You can include most unsecured debts in an IVA, which includes:
- Credit cards
- Payday loans
- Utility bills
- Personal loans
- Catalogues/store cards
There are certain debts that you cannot put into your IVA, including secured loans. The following types of debts will be excluded from an IVA:
- Mortgage or rent arrears
- Court fines
- TV licence arrears
- Hire purchase agreements
- Student loans
- Child support arrears
- Social fund loans
You will be able to include joint debts in an IVA, but the other party named on the debt will remain liable for the balance outstanding and can still be pursued.
If you have joint debts, it may be worth considering entering a joint IVA to cover you both.
Can you get a mortgage with an IVA?
It’s very unlikely that you’ll be accepted for a mortgage during your arrangement due to the fact that the IVA will be noted on your credit file and your score will be affected.
However, your chances are a lot better once your IVA has been completed or settled. Although, you may have to wait until it has been removed from your credit file – which takes a year after completion to happen.
If you get accepted for a mortgage, some lenders may ask you to pay a bigger deposit or charge you a higher interest rate.
Our advice is to give it some time; build up your credit score and then apply for a mortgage a little further down the line to give you better chances.
Can I get a car on finance with an IVA?
Many people think it’s impossible to get a car on finance whilst they’re in an IVA however this isn’t exactly true.
It is possible, but you will need permission from your IP first. This is because it’s written into most IVA contracts that you cannot obtain credit over £500 without it, and it will be a breach of your contract if you do.
Your IP will decide to allow you to apply for car finance based on whether you can afford the payments alongside your IVA.
Since it’s recorded on your credit file, you may find it harder to find a dealer to offer you finance.
There are dealers out there who specialise in agreements for those with bad credit, but the fees and charges will likely be higher than those of mainstream lenders.
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Can I keep my bank account with an IVA?
This will depend on whether or not you owe money to the bank. The bank has what is known as ‘the right to offset’, which means they may be able to take money directly from your account to pay your unpaid debts.
In these cases, you will be asked to switch banks to protect your income and your application won’t be able to move forward until you have done so.
If you have no debt with the bank and your account isn’t linked to any of your other debts, then you will be able to keep it and stick with your current bank.
You will not, however, be allowed any overdraft or credit facilities on the account in any instance.
How to apply for an IVA?
You’ll need to apply for an IVA through a licenced Insolvency Practitioner, who will work out how much you can afford to pay and create a reasonable budget for you to stick to.
You can do this directly with a provider, or we can do this for you by taking your details and passing them to one of our trusted partners.
They will then work with your creditors on your behalf to get your agreement approved, allowing you to begin the journey to a life without debt.
The IVA process
From the beginning to the end, an IVA is quite a journey – so to make it that little bit easier to digest, we’ve mapped it out below for you:
Initial chat with an Insolvency Practitioner
This is the very beginning of the process, where you make contact with an IP to start your IVA application.
You will discuss your financial situation and they are entrusted to give you as much information as possible to help you make an informed decision about if it is the best option for you.
They will also help you work through your income and expenditure to calculate what you can reasonably afford to pay towards your debts.
This part of the journey is where the paperwork comes in. You’ll be given a proposal document that will detail all the aspects, including the terms and conditions, of your arrangement that you will be required to sign.
Meeting of creditors
Once you have done this, it will be sent to your lenders, proposing the IVA to them and asking them to approve or disapprove of the suggested arrangement.
You don’t need all your creditors to approve your proposal – as long as the majority are in favour of your IVA, then it will be approved.
In some cases, a lender may reject your proposal. If this happens, your IP is obligated to negotiate the terms to attempt to reverse the decision. Most of the time, they will succeed in doing this, however, this may mean you’ll need to agree to some changes for the IVA to be approved.
Making monthly payments
If the proposal is accepted, you’ll start making monthly payments to your IP, who will distribute the funds to your creditors according to the terms of the IVA.
You’ll typically make these payments for a period of five to six years, after which any remaining unsecured debts covered by the IVA will be written off.
Life with an IVA
Now that you’ve reached this point – where your IVA is approved – it’s time to begin your payments and get yourself through the five-year arrangement.
Details of your arrangement will then be posted on the Insolvency Register and noted on your credit file.
Interest and charges are frozen on the debts included at this stage and your lenders cannot take any legal action against you.
Many IPs will also request you to complete yearly reviews of your circumstances to make sure that your IVA stays affordable to you.
They are then obligated to send you yearly reports to keep you updated on where your arrangement stands.
If you own any properties, you will be asked to attempt to release any available equity from your house towards the end of the arrangement.
If you can do this, the funds will be brought into your IVA and used to help pay back your debts – if not, then it may be extended by 12 months.
What happens at the end of an IVA?
Once you have completed the payment plan, your IP will then release you from your arrangement.
You and the lenders included will be issued completion paperwork that will confirm that the IVA is satisfied and that any remaining balances are now to be written off.
It will be your lender’s job to notify the credit reference agencies in regard to changing your debts to show as satisfied on your credit report.
However, the responsibility for notifying the agencies to update the IVA note on your file will fall to you.
It’s at this stage you can make a financial fresh start and begin working to rebuild your credit score.
Because you’ve been in a legally binding debt solution, it’s usually suggested that you wait around 12 months before trying this to allow everything on your credit report to settle.
Can you pay an IVA off early?
It is possible to pay off your IVA early if a lump sum becomes available. This could be for a number of reasons such as a change in circumstances or you simply want to release yourself from the arrangement early.
The money will need to come from a third party, and it will need to be offered to and negotiated with your lenders (this is done by your IP).
Your lenders then need to agree to the settlement to allow it to be paid and your IVA closed.
However, as mentioned above, this will be different if you come into money by way of a windfall.
How much you will need to pay will depend on your circumstances; how much you can offer and the remaining balance in your IVA.
Where can I get advice about IVAs and other debt solutions?
If you’re struggling with unaffordable debt, seeking the help of a debt management company can be a good way to improve your finances.
Talk About Debt is a leading UK debt solution provider. We offer a range of services, including advice on formal debt solutions available in the UK, to help you understand all available options and make an informed decision about your financial future.
Our experienced advisors are available to assist you in managing your debts and finding the debt solution that best fits your needs.
To learn more about how we can help you improve your finances, contact one of our advisors today.