An Individual Voluntary Arrangement, or IVA, is a formal agreement between someone who owes money and a group of people or companies to whom the money is owed. It sets out a fixed monthly payment, based on what the individual can genuinely afford, over a set period, usually five to six years. At the end of that period, any remaining balance on the debts included in the arrangement is usually written off.
An IVA is a legal alternative to bankruptcy. A licensed insolvency practitioner sets it up and supervises it, and once enough creditors agree, every creditor included in the arrangement is bound by its terms, even those who voted against it.
How does an IVA work?
An insolvency practitioner reviews the individuals income, outgoings and debts, then puts forward a proposal to creditors. That proposal is only approved if creditors representing at least 75% of the debt value (by value, not by number of creditors) vote in favour. If the IVA proceeds, an insolvency Practitioner, known as the Supervisor, will supervise performance of the IVA.
Setting up an IVA typically follows this pattern:
1. the individual speaks to a licensed insolvency practitioner about their circumstances and whether an IVA is realistic.
2. The insolvency practitioner prepares a proposal setting out what the affordability is /how funds will be realised to pay towards the debts (this can include future anticipated earnings or the disposal of assets).
3. The creditors vote on the proposal. It needs approval from creditors holding at least 75% of the total debt.
4. Once approved, the IVA becomes legally binding on the individual and on all the creditors included in it.
5. The payments are made, for the length of the arrangement.
6. At the end of the term, provided the agreement has been met, any remaining debt included in the IVA is written off.
What debts can be included in an IVA?
Most unsecured debts can be included in an IVA, such as:
- credit and store cards
- personal loans
- overdrafts
- catalogue and buy-now-pay-later debts
- some tax debts
Secured debts, such as a mortgage, are not usually included and certain debts (for example, some court fines, student loans and child maintenance) generally cannot be written off through an IVA.
Who is an IVA suitable for?
An IVA tends to suit people who:
- have unsecured debts they cannot realistically clear through normal repayment
- have a regular income and can commit to an affordable monthly payment
- want to avoid the restrictions that come with bankruptcy
- own a property or other asset they want to try to protect, where possible
It is not automatically the best option for everyone. If your income is too low or too unpredictable to sustain regular payments, or your debts are relatively small, other routes may serve you better.
What are the advantages of an IVA for the Individual?
- One affordable payment. Multiple debts are combined into a single, fixed monthly amount.
- Interest and charges are usually frozen. Once the IVA is approved, creditors included in it cannot generally add further interest or fees.
- Creditors cannot pursue the individual directly. Included creditors cannot take further legal action for the debts in the arrangement while it’s the terms are complied with.
- A fixed end date. The parties know from the outset when the arrangement, and the debt, will end.
- Less restrictive than bankruptcy. The individual can usually continue working in most professions and keep essential possessions.
What are the disadvantages of an IVA for the Individual?
- It affects the individuals credit file. An IVA is recorded on the individuals credit file for six years from the date it starts, which will make borrowing more difficult and expensive during that time.
- It is publicly recorded. An IVA is listed on the Insolvency Register while it runs.
- Missed payments put it at risk. If a payment is missed without agreeing a variation with the supervisor, the IVA can fail, and creditors may then be free to pursue the full original debt, including bankruptcy proceedings.
- Fees apply. The insolvency practitioner’s fees are usually built into the monthly payments rather than charged separately upfront.
- It may affect homeowners. If a property is owned by the individual, they may be required to release equity from it towards the end of the IVA.
How long does an IVA last?
Most IVAs run for five to six years, but this depends on the individual’s circumstances and what they agree with creditors. If the individual owns a property, the arrangement may run for a slightly shorter period on the basis that you release some equity near the end.
IVA vs bankruptcy: what is the difference?
Both are formal ways of dealing with debt that cannot be repaid in full, but they work differently.
- Control: an IVA lets the individual and creditors agree a proposal and, if approved, the individual maintains control over their finances and assets. Bankruptcy places the individuals finances under the control of a trustee.
- Assets: an IVA offers more scope to protect a home or other asset, subject to the terms agreed. Bankruptcy may require assets to be sold.
- Length: an IVA typically runs for five to six years. Bankruptcy usually lasts twelve months, though its effects, such as on the individuals credit file, are felt for longer.
- Restrictions: bankruptcy can restrict certain professions and require the individual to hand over surplus income for a set period. An IVA is generally less restrictive, provided its terms are met.
- Record: both are publicly recorded, but for different lengths of time and in different ways.
Neither option is automatically better. The right choice depends on the individual’s income, assets, the type and scale of your debt, and what matters most to you.
What are the alternatives to an IVA?
Depending on your circumstances, other options may be more appropriate, including:
- a debt management plan, an informal arrangement to repay debts over a longer period without the legal force of an IVA
- a Debt Relief Order, for people with low income, low assets and relatively small debts
- bankruptcy, where debts and assets are dealt with by a trustee
- negotiating directly with creditors, where the debt is manageable with some flexibility
A qualified adviser can help you weigh these options against an IVA before you commit to one.
How Tees can help
For individuals
Debt problems rarely arrive on their own. They can be tied up with a relationship breakdown, a business that has run into difficulty, or a health issue that has affected your income. Our personal legal services team looks at the full picture, not just the debt in isolation, so the advice you get reflects your actual circumstances and goals.
If you are weighing up an IVA against bankruptcy or another form of debt relief, we can explain what each option would mean for you in practice, including the impact on your home, your income and your credit file, so you can decide with confidence.
Worried about debt and not sure which way to turn? Speak to our personal legal services team for clear, practical advice on the options open to you.
For creditors
If you have been contacted by a Debtor or an Insolvency Practitioner on behalf of a Debtor to propose an IVA, Our specialist Insolvency Team can advise you of your position under the IVA and whether it would result in a better or worse situation for you and what other alternative options there may be to you, to recover the money owed to you.
