When you begin researching IVAs you will probably get the impression that the standard duration is five years. You will see mention of five years (60 months) with the potential to extend by up to 12 months in certain circumstances. The reality is that there is no set length for a typical IVA as written into the Insolvency Act 1986. This allows creditors and insolvency practitioners a degree of flexibility when faced with different scenarios.
The vast majority of traditional creditors have collectively accepted that a five-year IVA should be the standard duration. This is not written in law, there is no legal obligation to end an IVA after five years but this is widely accepted. We often see extensions of up to 12 months and in some circumstances above and beyond.
Extending the duration of an IVA
It may surprise you to learn there are various scenarios where an IVA can be reduced. However, in this section we will take a look at why an IVA might be extended which include:-
If you miss monthly IVA payments for a variety of reasons such as lack of funds, etc then traditionally these missed payments will be added on beyond the traditional five-year period. If at all possible it is sensible to advise your insolvency practitioner about your deteriorating financial situation other than simply missing the payments.
It is possible to request a formal payment holiday which will defer an element of the repayments although these will be added onto the original term time. Insolvency practitioners tend to be relatively accommodating where there are understandable reasons to request a payment holiday. There is no commercial sense in pushing an already financially challenged individual when it is obvious they are struggling to make payments.
There is a common misconception that those looking at an IVA solution to their debt problems will automatically be forced to remortgage their property. If you have in excess of £5000 equity in your property then under normal circumstances you will be asked to remortgage your home at some point. If at the end of the traditional five-year duration a remortgage has not been possible, due to a bad credit rating for example, this can be extended by an additional 12 months.
Over the last few years the financial industry has paid out literally billions of pounds in compensation with the majority relating to PPI. If you have entered into an IVA and have an outstanding compensation claim then this is likely to be included in your IVA settlement. As a consequence, your insolvency practitioner may extend the duration of your IVA (though not necessarily introducing additional monthly payments) while they await a decision on the compensation.
Reducing the duration of an IVA
As we touched on above, there are some circumstances in which it is possible to reduce the duration of an IVA. This does not necessarily mean a reduction in overall payments but more a case of changing the timing of these payments.
Full and final IVA
There is a scenario which is commonly referred to as a full and final IVA in which you may be able to reduce the duration of your IVA. Traditionally this occurs when a third party is able to provide a lump sum which allows creditors to be repaid quicker than originally expected. Windfalls and increases in your income do not count as a lump sum payment as they would simply become part of your repayment plan.
Inability to pay
Unfortunately, there have been scenarios where people have suffered further financial difficulties leading to cash flow problems. If it is clear that an individual is clearly unable to pay, and their situation is unlikely to change in the short term, the insolvency practitioner could bring the IVA to an early conclusion. For many people this may mean an application for bankruptcy as a means of clearing the decks and allowing them to start again.
It is very important not to fall into the trap of assuming that any windfall payments can be used to pay off outstanding capital in an IVA arrangement. Windfalls such as inheritance, lottery wins and the sale of assets will automatically become part of your settlement pool and will likely be distributed amongst your creditors. These payments may be above and beyond the previously agreed monthly repayments simply because your financial situation has changed.
There have been occasions where people have received windfall payments above and beyond the level of their original debts. In this scenario, it is likely that the original debts will be paid in full with any excess returned to the individual.
In reality there is no legally fixed term for an IVA but high street creditors have collectively agreed a standard five-year period. In various circumstances this can be extended by 12 months and beyond but anything over an additional year is uncommon. On the flipside of the coin, it is also possible to bring an IVA to an early conclusion for a variety of reasons such as a windfall or a lump sum payment provided by a third party.