How do IVAs work?

When you have debts to pay off, deciding on the best repayment option can be a difficult decision. There are various solutions available, and your choice will probably be affected by the amount of money and assets you have, as well as how much you owe.

One option for people struggling to keep up repayments and at risk of defaulting on debts can be an Individual Voluntary Arrangement (IVA). This is a contract with creditors (the people that are owed money), which allows the person in debt to repay the debts in regular instalments. Here we will look at how IVAs work, why people use them, and how having one may affect your credit history.

How the IVA process works

An IVA is set up and managed by a qualified Insolvency Practitioner (IP). He or she will work out the repayment plan (how much is paid each month, and for how long), and act as the intermediary between an individual and their creditors, to check they agree with the set monthly amounts.

As long as 75% of creditors give their approval to the IP’s proposal, the IVA will go ahead. Monthly repayments will then be made to the IP, who will split the money between the creditors.

The Insolvency Service lists IPs around the country, along with their contact details and Authorising Body. Although there’s a standard fee for IVAs, some organisations might charge for their advice or services, even if creditors don’t agree to the IVA.

IVAs are available in England, Wales and Northern Ireland, but not in Scotland.

Who qualifies for an IVA?

To qualify for an IVA an individual must have three or more creditors, and larger debts (typically over £15,000). An IVA can be a useful way to deal with repayments, helping people in debt to return a realistic and affordable amount to their creditors.

However, not everyone is eligible for an IVA and there are certain criteria that need to meet, especially because there are risks involved if repayments are not kept up. Failing to meet monthly repayments, means the IP could fail the IVA, and there is a possibility of bankruptcy.

Why would someone choose an IVA?

There are multiple options for someone who is facing debt problems they can no longer cope with, including Debt Relief Orders and bankruptcy. So why might someone choose an Individual Voluntary Arrangement?

• An IVA is legally-binding meaning creditors have to respect it – they can’t take any further action against a borrower while repayments are being made, such as applying for a County Court Judgment (CCJ) to be issued.
• An IVA is time limited, so repayments only have to be made for this amount of time. This works well for people who have a budget they believe they can stick to.
• Once the repayment period ends, the debts will be discharged – no more money will be owed to creditors, even if there’s leftover debt.
• IVAs will also be removed from the Individual Insolvency Register three months after the IVA ends.

Cons

However, there are also some risks involved with an IVA:

• There can be high costs associated with an IVA, because it has to be set up by a qualified IP. These fees usually include the set-up fee and the handling fee each time there’s a payment.
• If circumstances change (e.g. a decrease in income or increase in expenditure), and repayments are not made, the IVA will fail and could lead to bankruptcy.
• If an accountant or solicitor gets an IVA, the agreement might prevent them from continuing to work.
• Using an IVA may also require a personal pension to be used towards the repayments because it counts as income.

How do IVAs affect credit history?

An IVA will remain on a credit report for six years after the date on which it began. Once the IVA is completed, this information will be added to the report. The Insolvency Practitioner handling the case will send a certificate of completion to the insolvency service, who will notify credit agencies of this change.

While an IVA is still active, written permission from the Insolvency Practitioner is required to borrow more than £500, unless the credit is for utilities like water, electricity or gas.

A completed IVA appearing on your credit report may make it less likely that lenders will be willing to lend to you, as it shows that you have had trouble making repayments in the past. Having a completed IVA on your credit report does not mean it is impossible to get credit, there is no such thing as a ‘credit blacklist’, but it may take time to demonstrate a history of responsible borrowing. Making repayments on-time, not exceeding credit limits and not regularly using accounts to their limit will help improve your situation.