Individual Voluntary Arrangements - an Overview

With levels of consumer debt in the UK now exceeding £1 trillion it is of perhaps no surprise that more and more people are facing up to major financial difficulties. When a person finds that they can no longer keep up with their debt repayments one possible solution is an Individual Voluntary Arrangement (IVA).

Individual Voluntary Arrangements were introduced by the UK government as part of the Insolvency Act 1986. They were designed to provide a viable alternative to bankruptcy for individuals and small businesses. The government was concerned that in many cases bankruptcy can be a counter productive step in which both debtors and creditors lose out. The purpose of IVAs was to provide a better solution for all parties.

How does an IVA work?

An Individual Voluntary Arrangement is a formal agreement which allows a person to clear their debts in a fixed period of time. A person entering into an IVA has their debts consolidated into a single regular monthly repayment. Typically repayments will be made for a period of five years however there is a degree of flexibility in this. The actual IVA agreement will vary from case to case according to a number of factors including income, expenditure, size of the unsecured debt and the number of creditors. These factors are used are used to decide the length of the IVA and the size of the repayments. The amount of the IVA repayment will be based on what the individual can reasonably afford on their current income. Legally only a Licensed Insolvency Practitioner is authorised to prepare and manage an IVA.

Qualifying Criteria

Although Individual Voluntary Arrangements offer a large degree of flexibility they are not suitable for all situations and type of debt. For an IVA to be suitable certain qualifying criteria will usually need to be met. To qualify for a person generally must have unsecured debts in excess of £15000. In addition to give the greatest chance of the IVA being accepted it is expected that the debts will be divided between more than one creditor. It is also required that the person is in employment and so has a regular income from which to make the repayments. They should also not have any material assets that could be used to pay off the debt. The first stage of the IVA sees a proposal being made to all of the creditors. For the IVA to progress at least seventy five percent of the creditors must agree to it.

Benefits and Drawbacks

Individual Voluntary Arrangements are advantageous to both debtors and creditors when compared to other debt solutions including bankruptcy and debt management plans. Entering into an IVA offers a number of benefits. As the IVA is a formal arrangement you are protected from legal action and given a guarantee that the terms of the IVA will be adhered to. Firstly during the IVA all interest being charged on the debt is stopped as are all legal proceedings including petitions for bankruptcy. Additionally at the end of the IVA any remaining unpaid debt is written off leaving the individual free of debt. With an IVA it is possible that as much as two thirds of the original debt will be written off.

An IVA however is not suitable in all circumstances and in pure financial terms a debtor without assets or significant income would be better off applying for bankruptcy. After the new Law on bankruptcy was passed under The Enterprise Act a first time bankruptcy now only lasts for one year with a repayment period of 12 months to 36 months. In an IVA the repayment period lasts normally for 60 months so the debtor is committing to repay for a longer period than would be the case in bankruptcy. Obviously many people will opt for an IVA to avoid the social stigma of bankruptcy, however if the IVA creditors refuse to accept the proposed IVA then the debtor should look seriously at bankruptcy.

If you are having problems with debt then the first thing you should do is to speak to an independent debt advisor. There are many organisations that are able to discuss your debt problems with you and suggest the best way to overcome them. In most cases this advice will be offered free of charge. Although they provide a good solution to debt problems Individual Voluntary Arrangements aren’t suitable for everyone and so it important to get impartial advice before making a commitment.