An IVA is one of four main methods used in the UK to deal with personal debt issues. An IVA is short for an Individual Voluntary Arrangement. An IVA is mainly used in personal debt situations where there is a house or other assets that you wish to protect, although it can be suitable in other circumstances.
How does an IVA work
An IVA usually lasts for 5 years but can in some circumstances last for more or less time. It is an excellent way to clear your debts as it has many powerful advantages. A lot of people seem to not understand how an IVA works. An IVA will usually:
- Clear your debt in 5 years
- Enable you to make lower payments for your debts
- Let you make payments you can afford for your debts
- Write off a large percentage of your debt, usually between 20% to 70%
- STOP your creditors ever contacting you again
- Allow you to keep your home and other assets
However although this sounds fantastic you have to realise that taking out an IVA is a serious piece of medicine. If an IVA fails it could result in you being made bankrupt. This will not necessarily happen all the time, but it’s something to be aware of. Therefore it’s vitally important to stay in touch with your insolvency practioner, and let him or her know if there are any changes to your financial circumstances.
Eligibility for an IVA
You are eligible for an IVA and meet the IVA criteria if the following apply to you:
- You owe £15,000 or more to all of your creditors
- You must not be able to afford the current repayments on your debts
- You must have 3 or more different creditors
- No creditor can be owed 75% or more of the total debt
- You must be able to afford to pay back at least £200 per month
- Your home must have less equity than the total debt you owe
- You must not be reliant on benefits for your income
Cost of an IVA
An IVA has some costs but they are indirectly paid by the creditors. You should never be asked to pay any IVA costs to get an IVA arranged. If you speak to anyone asking for money upfront you should run a mile!
The three other main ways to deal with debts
Debt Management Program
This is an informal arrangement with creditors. The amount that that you can afford to pay is calculated by the debt management company. All of your essential expenditure is calculated, and all of your reasonable living expenses are added to that. This calculation excludes what you pay on secured borrowings such as a house or car loan. This is so that your disposal income not including your debt is calculated.
Once you accurately know how much disposable income you have you will know how much you can afford to pay for your creditors. This is amount is divided between your creditors on a pro-rata basis. This means that your creditors will get a percentage of your disposable income according to the percentage you owe them out of the total debt. This is then offered to your creditors on a monthly basis. The debt management company will likely be able to get the majority if not all of them to stop charging you interest. This means that the debt will be paid back much more quickly than it would have been otherwise.
Debt Relief Order
A debt relief order is very similar to bankruptcy. It is however quicker, simpler, and cheaper to arrange than bankruptcy. To qualify for a debt relief order you:
- Must be able to afford to pay less than £50 per month to your creditors
- Must not be a home owner
- Have no assets worth more than £300, for example a car or a computer
- Owe less than £15,000 to all of your creditors
- Live in England or Wales
A debt relief order is a very powerful way to clear debts, but many people do not qualify for this due to their income or their assets.
Bankruptcy is a very quick way to clear ones debts. However although there is less stigma attached to bankruptcy these days, it is often seen as the last option. In bankruptcy it usually is not possible to keep your house or any high value items. The bankruptcy will clear your debt in just 1 year, although you may have to make payments to your creditors from your disposable income for up to 3 years. If you are unsure if an IVA or bankruptcy is best, remember that it certainly is an option to be considered when you are in debt, but it’s best to look at this after other options such as debt management plans or an IVA are considered.
Getting an IVA
Getting an IVA can seem to be a fairly complicated process, however with the help of an expert company it is not as hard as it may seem. Yes, it’s a little more complicated than applying for a loan, but it can be arranged fairly quickly and easily.
Stages of getting an IVA
1) Contact a reputable IVA company
Firstly you’ll need to get in touch with someone to discuss your situation. There are many debt solutions, and you firstly will need to find out if an IVA is right for you. You will do this by initially having a brief discussion and then arranging a subsequent telephone financial review. That is where you look at the complete picture of the health of your finances by looking at your debts, your income, your living expenses, your assets, and your liabilities.
You will need to establish that you have debts over £15,000, can afford at least £200 per month, and have a stable income so that the IVA is not likely to fail. When thinking about IVA costs remember that an IVA is arranged free, and as long as it’s completed successfully your creditors will ultimately pay all of the costs.
2) Contact with the insolvency practioner (IP)
Once you’re confident that an IVA is likely to be the right solution for you, you will need to get in touch with an IP. The IP will wish to check and verify all of the information that you have given. The IP will need to see copies of bank statements, pay slips, as well as ID such as a driving licence or passport. As all of the information given is thoroughly checked it is very important that during the review you are as honest and accurate as possible. The IP will also send you some forms to be signed to confirm that you are happy for him to work for you to arrange the IVA.
3) IVA Proposal is put forward
Once the IP is completely happy with the proposal he will lodge the application with the court, and then in 2-4 weeks there is a meeting of all of your creditors. This is where they all get to vote on if they accept the IVA proposal. They don’t normally actually meet up. In most cases they will send their votes into the IP.
4) The IVA is either agreed or not agreed
To get the IVA approved 75% of your creditors need to agree to the proposal. Once this happens all of the creditors (even the ones that voted no) are bound by the agreement, as are you in regard to your responsibilities. The 75% figure actually means that creditors who are owed 75% of the total debt must agree. For example, if you owed £10,000 to capital one, £5,000 to Barclaycard, and £5,000 to MBNA, you would need creditors owed a total of £15,000 to agree. In this scenario if capital one didn’t agree, then the IVA wouldn’t be able to go forward.
5) The IVA is agreed
Once agreed the IP will be in touch to tell you exactly when the payments will start. You now know that in (normally) 60 months you will be completely debt free. You will need to be in touch with the IP whenever there is a change in your circumstances, and it’s always best to be in constant communication.
How does an IVA work
An individual voluntary arrangement (IVA) is essentially a formal arrangement to pay your debts to your creditors for less money if you can no longer afford to keep up the standard terms of repayment. An IVA is a debt solution not known so well as bankruptcy, and a lot of people ask what is an IVA.
We’ll try here to explain how an IVA works. To get an IVA you will need to have an IP (insolvency practioner) who will propose the IVA to your creditors. Your creditors then will decide if they wish to accept the IP’s proposals.
Referral to the insolvency practioner
At this point you will hopefully know that an IVA is highly likely to be the best option for you. The IP will need you to sign a few forms confirming that you are happy for them to act for you, and those forms will go out in the post to you straight away.
They will wish to verify the information provided so be prepared to send in copies of bank statements, utility bills, and pay slips. They will also likely wish to confirm that you are who you say you are, so you will have to send in copies of ID such as a passport or a driving licence. Once they have everything they need they will work on the proposal for your creditors at eventually put the proposals forward at the meeting of creditors.
The IP will finally lodge the details of your proposals in court, and a creditors meeting will be set up (usually between 14 and 28 days afterwards). You won’t attend the creditors meeting, but you will need to be available on the telephone in case the creditors have any additional questions that they wish to ask you via the IP. In fact the creditors meeting is almost like a ‘virtual meeting’, as it’s highly unlikely that they will attend themselves. Normally the creditors will send in their vote to the IP by phone email or fax.
The creditors get to vote if they accept the proposal put forward by your IP. To simplify things, they get 1 vote for every pound that you owe them. This way it’s fair as creditors who are owed more get a bigger say in the proposal.
You need to get 75% of the votes to approve the IVA for the IVA to be approved. As long as you get the 75% the other 25% have no choice but to accept the terms of the IVA and they are tied to it too.
Success – the IVA was approved!
Once the IVA is approved you will be informed in writing by your IP, and he will tell you when payments into the IVA will start. Usually an IVA lasts for 60 months (there are exceptions where it can be an additional year), so in 60 months you will be completely debt free as long as you keep up your agreed payments
Failure – the IVA wasn’t approved!
In the event that the IVA wasn’t approved you can investigate other options again. Obviously it’s important to get feedback as to why it wasn’t approved, and that information can be used to work out the next plan. It could be that debt management could be the next best thing, or it could even be that after a few months of a debt management plan an IVA could be proposed again.
It can be quite confusing reading around the internet as to what are the costs of an IVA. You will hear many companies saying that an IVA is arranged for free and some saying that there is a charge. We’ll break it down for you so you can understand how fees work in an IVA and who pays them.
Companies charging a fee
Some companies will charge you a fee to propose you to an insolvency practioner (IP) to get an IVA. The truth is they don’t need to charge a fee. They do it because they can!
You should never use any company who proposes to charge you directly for an IVA.
Companies saying an IVA is free
Most reputable IVA firms will not charge a fee for you to be proposed for an IVA. They will tell you that your creditors pay ALL the fees, and ultimately an IVA can be arranged for you at absolutely no cost to yourself!
However this is not exactly true! Stay with us…. we’ll explain!
There are 2 main fees for an IVA. These are the nominees and the supervisor’s fees. It is a lot of work proposing and supervising an IVA, and obviously somebody has to pay for the cost of this. An IVA can ONLY be proposed by an IP. Only a qualified solicitor or accountant can train to be an IP, so you can imagine that they wish and deserve to be paid well for their services. All IVA’s have these costs even if a charity arranges it for you!
This is the fee to arrange the IVA and put the proposal together, and arrange it with your creditors. The fee largely depends on the complexity of the case, but usually these are around £1,000 to £1,500.
This fee also varies case by case and is agreed with your creditors as part of the proposal. The fee is usually between £350 and £800 per year. This fee covers the cost of administering your IVA on an ongoing basis.
So who pays these fees then?
This is where it gets interesting, and you can see why there is some confusion in this area.
You pay your monthly payments into the IVA for 60 months, and IF the IVA is completed successfully the rest of your debt is written off.
When you pay into the IVA the IP’s fees are taken FIRST, and then your creditors get what’s left over from your monthly payments.
Once you complete the IVA your debt is written off, and so ultimately your creditors have paid ALL OF THE FEES. The IVA has been completely free from your perspective and it has cost you nothing.
What happens if the IVA fails?
Here’s where it gets more complicated. If the IVA fails (for instance if you can’t keep up the repayments), then the creditors will not be writing off the remaining debt. This means that the payments you have made minus the IP fees will be all that you will have paid off the debt.
In this instance it is YOU who has paid the cost of an IVA!
You can see why it is so important to keep up with your IVA once you enter into one. You have to be sure that no matter what you can keep up with your end of it, otherwise you will have wasted a lot of time and money and not have written off the debt you had hoped to.
Is an IVA a good idea then?
Well yes an IVA can be fantastic for dealing with your debts. In the right situation it is a very powerful tool for dealing with debt. We’re not trying to scare you here talking about the fees, just we feel it’s right and proper that you have the full information regarding the true cost of an IVA.
You should now understand what is an IVA. To be successful in getting an IVA there are a number of IVA criteria that must be passed. IVA’s aren’t for everybody, and you must remember that there are lots of debt solutions which must also be considered before the decision to get an IVA is made. You should also make sure you are fully aware of the IVA costs.
The debt itself:
- An IVA is not for secured debts. The main debts that can be included are unsecured debts, such as credit cards, loans, store cards, and overdrafts etc. For those people who are self employed, VAT and some taxes can be included.
- The debt must be above £15,000. An IVA is a serious piece of medicine and other debt solutions are more suitable for lower amounts of debt.
- The debt must be larger than your total assets
- The debt needs to be owed to 3 different companies. For instance, a credit card, overdraft, and loan with Halifax would be considered as money owed to just 1 company. Furthermore if there are 3 or more companies that are owed, no one company should be owed 75% or more of the total debt.
- You must have a stable income and be able to show you can meet the payments every month for the duration of the IVA
- You must be able to afford to be able to pay at least £200 per month for the length of the IVA.
- Your total payments into the IVA must total at least 25p in the pound by the end of the IVA. For example, if you owe £48,000 and can afford £200 per month, this would be £12,000 paid into the IVA over 60 months. This would be the minimum amount that would be acceptable to your creditors, although obviously higher amounts are more likely to be approved.
- You need to be able to show that you have budgeted correctly for your living expenses and essential expenditure. For example claiming clearly too much or too little for food is not a good idea. Creditors want realistic proposals. Of course, we will help you with this.
What does an IVA cost?
IVA costs are more complicated than they seem at face value. As long as you complete the IVA and make the full payments for the term of the IVA, then your creditors pay all of the costs and it works out completely free for you.
What are the criteria?
The criteria for an IVA are as follows. You need to have debts over £15,000 and have a disposable income of at least £200 per month to pay your creditors with. No one creditor can be owed more than 75% of the debt.
Can I keep my home in an IVA?
Yes you can. Unlike bankruptcy you do not have to sell your home. However in the final year of the IVA you may be expected to remortgage to pay some of the equity into the IVA. This of course will all be explained before the IVA goes through, so you will know exactly what is expected of you. Sometimes if a remortgage can’t be arranged there is an expectation that the IVA will be extended for a further year and you will have to make twelve additional monthly payments.
Should I get an IVA or bankruptcy?
The decision as to an IVA or bankruptcy is not a simple one. It’s more an art rather than a science. Essentially it’s a decision based on many factors and ultimately a trained debt advisor will help you make that decision.
Will my credit rating be affected?
Yes it will show on your credit file for 6 years. You won’t be able to get more credit during the IVA and it may be difficult for some time after the IVA. However you shouldn’t want to get more credit. After the IVA you will have significantly more money available to you, and you shouldn’t need to be getting more finance.
What happens after the IVA?
Once the IVA is completed you will get a certificate from your IP to show that the IVA has been completed and all of the debt has either been paid or written off by your creditors. You will have much more money available as you will no longer be paying these debts. The aim would be to never borrow money again and live much more happily knowing you are living within your means.
IVA or Bankruptcy
When dealing with you debts, all options need to be considered. There is no magic bullet. There are many options for dealing with your debts. The main ones are:
- An IVA
- Debt Management
- Debt Relief Order
- Debt Settlement
If you’re unsure if an IVA or Bankruptcy is best for you, then there is a lot to consider.
How is bankruptcy or an IVA similar?
Bankruptcy and an IVA are both a form of insolvency. They allow you to write off potentially large amounts of debt, which means you can get out of debt faster.
They both affect your credit rating for 6 years which means you will likely be unable to get credit for some time. Of course, getting credit got you into the situation in the first place so that’s no bad thing. The aim of both bankruptcy and an IVA is to get you out of debt quickly. They both also are not able to write off certain types of debts such as secured debts or court fines for example.
Is bankruptcy going to be a better way to get out of debt?
Well the answer is that it could be, but that depends on your circumstances. If all of the following apply to you, then it certainly should be considered.
- Do you have no assets such as a home or anything else of high value
- Is there no way you can afford to repay 25% of your debts in the next 6 years
- Is your financial situation not likely to improve in the next few years
- Is your disposable income really low or does it change often and so is not very reliable
- Are you or do you plan to be a company director in the near future
Is an IVA going to be better for me?
An IVA could be better if you meet the IVA criteria, but again it all depends on your circumstances. For example if you are unemployed and don’t own your own home, then bankruptcy is clearly the better option. An IVA can seem a little complicated to arrange and a lot of people are unsure about how an IVA works.
In an IVA your home is protected and you won’t have to sell and move out of your house in horrible circumstances. In fact to compare the two, an IVA is much more pain free. Essentially you carry on as normal and make your 60 monthly payments over a 5 year period and then your debt is all paid off.
The key with an IVA is that the payments are calculated to a level that you can really afford. Once the IVA is agreed then you have to move heaven and earth to make sure that you make those payments each month. Huge amounts of debt get written off, but only after the very last payment.