What is an IVA?
You might be asking yourself – what is an IVA?
An IVA (Individual Voluntary Arrangement) is a legally binding agreement between an individual and creditors to pay off part of outstanding debts. As the agreement is approved by the courts it is imperative that all parties stick to the agreed terms and conditions. While there is a degree of flexibility with regards to the setting up of an IVA it is very important that the repayment terms, in particular, are viable in the longer term.
How to set it up?
All agreements are set up by insolvency practitioners (traditionally lawyers or accountants) with input from the individual and their creditors. The insolvency practitioner will review the individual’s situation and decide whether an IVA is the most appropriate way forward. There are many different factors to consider but there is only one goal, agreeing to a debt repayment plan which is viable for the individual and also offers some value to creditors.
There are various stages:
- Review of individuals financial liabilities
- Negotiations with creditors
- Legally binding agreement
- Management of payments
The insolvency practitioner managing the agreement will charge their time and expertise. This payment is normally part of the monthly repayment plan. As the overall aim of an IVA is to minimise the individual’s financial liabilities you should research the cost of different insolvency practitioners.
What type of debts can be included?
After undertaking a review of your finances, the insolvency practitioner will advise you of the debts which can be included in an IVA and those which do not qualify. For example, the following debts can be included:
- Credit card debt
- Personal loans
- Local authority tax arrears
- Mortgage shortfalls
- Income tax/national insurance contributions
- Hire purchase debts
- Retail debt such as catalogue accounts
- Gambling debts (conditions attached)
On the flipside of the coin, there are some forms of debt which are not applicable to an IVA which include:-
- Court fines
- Child maintenance/support arrears
- Types of car finance
- Student loans
There is sometimes a common misconception that all of an individual’s debts can be included in an IVA when this is not the case.
Negotiating with creditors
Ultimately creditors have control over whether an individual can go ahead with an IVA. In many cases, this is generally preferable to bankruptcy where significantly reduced payments may be available. It is the role of the insolvency practitioner to approach all creditors on behalf of their client with a proposed repayment plan within the arrangement.
In order to obtain approval, a minimum of 75% of creditors by value would need to vote in favour. Due to the obvious distress of the individual, assuming that the payment plan is credible, the vast majority of creditors will be opened to such an arrangement. On occasion, creditors may request additional terms and conditions are added to the IVA but this will depend upon the individual circumstances.
In the event that a minimum 75% of creditors by value voting in favour of the IVA a legally binding document will be drawn up and signed by all parties. The arrangement will be ratified by the courts and the next stage is to arrange regular repayments.
It is vital that the terms and conditions associated with an Individual Voluntary Arrangement reflect the individual’s income and repayment capabilities. When you consider that a traditional IVA will last five years – although there is the option to extend a further 12 months in certain circumstances – it is essential that the repayment plan does not overstretch the individual’s finances.
The insolvency practitioner is central to the repayment process with all payments going through a bank account under their control. Once received, funds will be split on a pre-agreed basis which will include funds towards the insolvency practitioner’s fees and prearranged payments to creditors. In the event of any financial difficulties, it is vital to contact the insolvency practitioner at the earliest opportunity. It may be possible to reschedule some repayments if agreement can be reached with creditors.
Conclusion of an IVA
Standard IVAs have a five-year term although there may be the opportunity to extend this by 12 months under certain circumstances. On the conclusion of the arrangement, any outstanding debts will be written off and a full summary provided by the insolvency practitioner. Notice of it will remain on an individual’s credit file for six years from the date of approval. IVAs with an additional extension will remain on the individual’s credit file until it has expired.
There are a number of factors to take into consideration when setting up an IVA such as the type of debt, whether it is appropriate, negotiations with creditors, potential repayments and the conclusion of a standard five-year term (although this can be extended to 6 years in some circumstances). The idea behind an IVA is simple; an individual agrees to repay a percentage of their debts to creditors. Assuming the individual maintains these repayments the remaining debt will be written off when the arrangement comes to a close.