An IVA, or Individual Voluntary Arrangement is a formal contract between two parties, the debtor and creditor, to help people in financial difficulty to formulate a proposal to pay off their unsecured debt. An IVA tends to last five years, and in that time-frame the debtor is expected to pay whatever they can afford. An IVA has to be set up by a licensed Insolvency Practitioner and the debtor has to declare all unsecured debts in the agreement.
The main advantage of an IVA is that all interest and charges on the declared unsecured loans will be stopped so the debt isn’t allowed to increase and creditors aren’t allowed to demand additional payments for the duration of the IVA, so it gives the debtor an opportunity to repay their debt on a fixed and steady schedule.
How does an IVA work?
If you decide that an IVA is an option to consider in order to resolve your debt problem, the first step is to get an assessment detailing your current financial situation. This information will be used to calculate a repayment amount, and your creditors will then be able to vote to either accept or reject the arrangement. If you keep up with the calculated repayments for the entire duration of the IVA, the remaining debts will then be discharged, regardless of the amount still outstanding on these debts. The IVA is legally binding, so failure to keep up the repayments can lead to adverse consequences such as the failure of the IVA, which in turn can lead to formal bankruptcy. Your financial situation will also be reviewed yearly to see if it has changed.
If your creditors accept the IVA, the insolvency practitioner will become a supervisor, making sure that the payments are met and periodically evaluating your progress. This is to ensure that all terms and conditions are being met to the satisfaction of both parties. The IP will also be responsible for distributing your repayments to your creditors on a pro-rata basis until the IVA is completed.
How are payments calculated?
The monthly IVA payments are calculated based on your financial situation and what you can actually afford to pay back comfortably. These payments are pre-calculated before the agreement is signed, and will be re-evaluated annually with regards to any changes in your financial circumstances and may change either way based on your incomes and expenditure during the year. Once the IVA period is up and the final payment made, the rest of the debt is discharged, which can sometimes be as much as 70%. While your home may not be at risk, if you are a home-owner you should expect to release equity as part of the IVA process.
The difference between an Individual Voluntary Agreement and a Debt Management Plan
While both programmes are designed to help you pay off debt in a manageable way, the DMP tends to have a number of disadvantages over using an IVA. The main disadvantage of the DMP is that you have to repay the full amount of the debt, which can take quite a long time. An IVA lasts for a specified period of time after which the debts are discharged if all repayments are made. During a DMP, the creditors are allowed to add interest and late fees to the amount to be paid off, which is not allowed with an IVA.
A DMP is not a legally binding agreement, meaning that the creditors can, without warning, break the agreement and can add further interest or ask for increased repayments. An IVA is a binding agreement, meaning that neither the creditors not the debtor can change it after it’s been signed.