If you’ve taken on an Individual Voluntary Arrangement (IVA) and you want to stop making IVA payments and clear it with a lump sum, then read on to see what’s possible and what you need to consider.
Is it possible to pay off an IVA early?
It is usually possible to pay off your IVA early if you have a good reason to do so. If you feel like it’s adding too much pressure to your day-to-day life and you suddenly have money available to you, then clearing it may be beneficial. But you aren’t guaranteed to be accepted when you offer this to your creditors. And it’s important you understand what the actual benefits are too.
Paying off your IVA doesn’t suddenly fix your past credit issues, and many people would be better simply continuing with their monthly payment until they reach their agreed conclusion. If being free of debt regardless of the impact on your credit file is something that would help you, speak to your Insolvency Practitioner to find out more.
What are the reasons to consider paying off your IVA early?
It’s important to note immediately that if you settle your IVA early it doesn’t get it removed from your credit file – which we’ll cover further below. But that doesn’t mean that there are no benefits to getting it paid off early.
If you do have a viable lump sum available, then by clearing the debt you owe you can stop the regular IVA payments and take more control of your finances. You’ll no longer need to provide a budget every year and you can start rebuilding your credit sooner.
You can start making some positive steps with your credit score. They won’t make much of an immediate impact, but if you start rebuilding your score slowly now, then when the IVA does get removed from your credit file after six years, then your score will start to improve.
It’s also worth remembering that if you do make an offer to pay off your IVA early, and it’s rejected by your creditors, this doesn’t mean your IVA agreement will end.
How will it affect your credit score?
One of the biggest misconceptions when you settle your IVA early is that it’ll get it removed from your credit score sooner. This is not the case, and the IVA will remain on your file for the full duration of six years from the start date, even if you were to settle your IVA after just a few months.
This means that your IVA will affect your ability to get new credit for a long time, which is something you should consider before taking out the IVA in the first place. And even if you can get credit, it’s unlikely to be available for large amounts. So if you’ve plans to clear your IVA so that you can take out a mortgage and get on the property ladder, the reality is that you may be forced to wait a few years until your credit score is clear of the IVA completely.
If you file for bankruptcy, and then end up being able to pay your debts completely including the bankruptcy costs, you can claim to have the bankruptcy annulled and removed from your history, but with an IVA this isn’t possible, even if you paid the full amount of your debts owed.
What are you allowed to use to pay off an IVA?
It’s important to be clear on what funds you’re allowed to use to clear an IVA. Considering that most IVAs will see you only repaying a fraction of your total debt, creditors will normally be entitled to any windfall you receive during the agreement, without any change to your monthly repayments. So if you suddenly qualify for a large bonus at work, don’t start celebrating yet – your creditors may take that money from you to repay some of the debt that would have otherwise been written off at the end of your agreement.
Some windfalls aren’t automatically due to your creditors – a typical example of this is redundancy money. If you lose your job through redundancy, you can make an offer to use this money to repay your IVA early. In these situations, you may be able to settle for a lower amount too. Your creditors should always leave you with enough money to live on for three months if it looks like you won’t be getting a new job immediately. So, speak to your Insolvency Practitioner to see what looks to be the best option for you.
For most people who want to clear an IVA early, the money will come as a gift from a family member or friend. It’s important that they don’t just give you the money, but instead, they should be the ones to make a formal written offer to pay for the IVA on your behalf. By formally stating it is a gift and that it is solely for repayment of the IVA, it prevents your creditors from claiming the money to repay the debt you would otherwise have written off, and then it is up to them whether they accept the offer.
How to settle an IVA early?
In order to signal your intent to settle your IVA early, you’d need to inform your Insolvency Practitioner. They’d look at your offer and decide how realistic they think it is that your creditors may agree to it. If they believe it is sufficient enough for the creditors to accept, they’ll set up a Variation Meeting. This is a meeting where any changes to your IVA are discussed.
Just as when you initially proposed your IVA, you need 75% of your creditors to agree to any change to the IVA – in this case, paying it early. If 75% of your creditors (by amount of debt owed) agree to let you pay it early, then the others are bound to the agreement.
As part of your proposal, you’ll need to have a strong reason for wanting to clear your IVA early, and you’ll need to make this clear to your creditors. You’ll also need to make sure that your offer is reasonable, and you need to demonstrate where you’ve got the money from to pay for it – if it’s something they’re already entitled to, they’ll just take the money and continue to enforce the monthly payments.
Finally, you need to show that you won’t get into financial trouble by paying it off early. If you’re borrowing money to repay the IVA, but you leave yourself in a situation where you can’t afford the new debt, then you’re back to square one, and the likelihood is that your solution will be rejected.
The cost of paying off your IVA early
The amount of money that it’ll cost for you to end your IVA early will depend on your circumstances. For the most part, your creditors are unlikely to give you any further discounts on the debt you owe to them, so your lump sum should be as close to the full value of your monthly payments as possible.