An individual voluntary arrangement (IVA) is a formal and legally binding agreement between you and your creditors to pay back your debts over a period of time. This means it’s approved by the court and your creditors have to stick to it.
An IVA can be flexible, to suit your needs but it can be expensive and there are risks to consider.
What is an IVA and what does the procedure entail?
As mentioned above, we are going to touch on the procedure and what may see an IVA granted.
What is an individual voluntary arrangement?
IVAs, or individual voluntary arrangements, were introduced as an alternative to bankruptcy. As mentioned above, an IVA is a legally-binding contract between an individual and his or her creditors. An IVA is often regarded as the best option for individuals with assets. It provides the necessary breathing space to regain control over finances. Debts that can be dealt with via an IVA include personal loans, credit card debts and other unsecured loans.
As an individual voluntary arrangement is a formal procedure, a licensed insolvency practitioner will oversee the process. The IP will produce the IVA proposal, set out to repay debts over a reasonable period. The IP will then work to negotiate the agreement on your behalf, but you must disclose all financial details. If more than 75% of voting creditors accept the terms, the IVA is legally-binding on you and all of your creditors. You must then begin to make the repayments. It’s important to note that creditors cannot add interest or demand more when an IVA is granted.
The role of the insolvency practitioner
The role of the insolvency practitioner will change throughout the IVA process. Initially, the insolvency practitioner will act as an advisor. They will look to establish whether an IVA is indeed the best option for your circumstances before you proceed. They will then assist in the preparation of your IVA proposals.
Once the IVA proposals have been prepared, the insolvency practitioner will prepare their own report to creditors. This will detail what investigations they have carried out to support your proposals, recommending whether or not the proposals should be accepted. At this stage, they are known as the nominee. The nominee will forward their report along with your proposals, and obtain a decision from creditors as to whether the proposal should be approved.
If the IVA proposal is approved, the nominee will become the supervisor. At this point, it is their role to ensure the terms of the IVA are met by all parties. They will also aim to balance the interests of you and your creditors.
While an IVA is considered more flexible than a bankruptcy petition, you will have to pay to set up the procedure. An IVA can only be initiated through an insolvency practitioner, and the IP will charge a fee for doing so. The method for payments will vary with different practitioners. Some may take fees from the monthly payments, and others may ask for costs prior to setting up the IVA. Whilst the advice stage will generally be free, the nominee and supervisor fees will be included in the IVA costs.
Will I be placed on the insolvency register?
If you enter an IVA, you will be placed on the insolvency register. The information also contains your name, address, date of birth and occupation. The insolvency register – which also records bankruptcy orders and other voluntary arrangements in England and Wales – is open to the public. This could affect employees in the financial sector, so you must consider all options before entering into the procedure. However, your entry on the insolvency register will be removed three months after your final payment, once the IVA has finished.
How long does an IVA last?
The typical length of an IVA, in most cases an IVA’s lasts for around five to seven years. The exact duration depends on your ability to pay back the monthly installments. For example, if you offer a lump sum to creditors, they can last less than five years. The insolvency practitioner will put forward the number of months in which the procedure will last, offering realistic monthly repayments. Most IVAs will require you to remortgage any property you own. However, if you are unable to do so, creditors will generally expect you to pay for at least an additional 12 months.
What do I need for an IVA?
Not all individual voluntary arrangements can be granted, as there are certain criteria to meet. You must have sufficient surplus income to put forward a contribution to your creditors proportionate to the level of debt. Before you look into the procedure, we suggest you produce a budget on what you can repay. The insolvency practitioner will also work with you to ensure you are not paying more than you can afford. They will also suggest areas you may need to reduce your spending.
IVA pros and cons
It’s important to consider the IVA pros and cons before initiating the procedure.
- The IVA will last over a certain period of time, usually no longer than seven years
- A creditor cannot ask for additional payments or interest demands when entering an IVA
- The IVA affords individuals protection over certain assets – such as a car – as well as your home
- Once you have completed the IVA, you can improve your credit rating
- An IVA allows for better return for creditors than in bankruptcy
- The IVA is a legally-binding contract, so you will always know where you stand and how much you have to pay back each month
- Your creditors cannot take further legal action against you
- Bankruptcy can significantly affect your professional status in particular industries, whereas an IVA is seen as more acceptable
- You cannot borrow during the IVA, or use store and credit cards
- Your credit rating will be affected during the IVA. However, you can begin to improve your credit when the procedure has ended
- An IVA lasts longer than bankruptcy
- You will be included on the insolvency register
- The procedure can be costly, as you will have to include all creditors and pay IP fees
IVA vs bankruptcy
An IVA is a formal debt process, but is less extreme than a bankruptcy petition. Filing for bankruptcy is not to be taken lightly, as it removes all financial control and can leave a poor financial reputation. Similarly, bankruptcy petitions can seriously affect your professional status. Many industries are unable to hire those who have previously filed for bankruptcy. The social status regarding an IVA is also seen as less damaging than personal bankruptcy. However, it’s important to note that an insolvency practitioner can initiate bankruptcy proceedings if you fail to keep up repayments.
An IVA offers more flexibility than bankruptcy. It may be possible to keep certain possessions when proposing an IVA. You can also continue to use your bank account when entering an individual voluntary arrangement, whereas your account is likely to be closed when filing bankruptcy.
After the IVA
When you enter a formal debt solution, credit agencies are informed. A note will be made on your credit file and will remain there as long as the IVA lasts. Similarly, you will be placed on the IVA register. As lenders carry out due diligence tests, it’s likely that the IVA will affect your ability to gain credit. Even when the IVA is removed from your record, you may fail to obtain credit. However, there are many lenders who specialise in helping those who have been in debt. You can improve your rating with the likes of a ‘credit builder’ card. The same will go for those who are looking to obtain a mortgage after an IVA. You will not be able to do so during the procedure, and may struggle after you have made the repayments.
Can I still be a director after an IVA?
Unlike bankruptcy, a director does not have to resign or lose their position when entering an IVA. However, some companies may include a provision in their contracts, stating an IVA is grounds for dismissal. Your IVA cannot stop you going on to become a director, unless the company states they do not hire those with an IVA on their record. This is highly unlikely, due to the number of individuals entering the process.
Ultimately, you must seek advice before bankruptcy becomes your only available option. Our licensed insolvency practitioners can work with you to ensure your proposal is realistic, and you can meet all installments, as well as provide the necessary IVA advice.