How does an IVA work?

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How does an IVA workAn IVA – Individual Voluntary Arrangement – is a debt solution whereby you reach a formal, legally-binding agreement with your creditors to repay your outstanding debts to your creditors. The IVA lasts for a fixed time period and requires the agreement of your creditors and the approval of a court.

Although, like bankruptcy, an IVA is a form of insolvency, different rules apply to each and will affect your status and finances in different ways.

Setting up an IVA requires the involvement of a qualified professional, known as an insolvency practitioner (IP), who will usually be either a solicitor or an accountant. It is not possible to take on this role yourself. Your IP will charge a fee which covers a range of aspects such as negotiation and setting up the IVA, plus administering the IVA and dealing with creditors on your behalf once it is in force. Fees vary on this service depending on the amount of work required to complete the whole process most of which are charged by the IP as part of the case itself.

For an IVA to be a viable proposition, you must be in a position to regularly repay a set amount each month for the agreed term to the IVA administrator who will then distribute this to your creditors on your behalf.

Repayments

If you choose to proceed with an IVA, the first step involves working out a realistic, affordable repayment plan with the help of your IP. This proposed plan is then put to your creditors via your IP, and if it meets with their approval, you will then repay the promised amounts as monthly instalments over a five-year period.

Once an IVA is approved by a court, your name will be placed on the Insolvency Register for the duration of the IVA, and your creditors can no longer contact, or take action against you. Acting as an intermediary, your IP will receive each instalment from you in order to repay them. In practice, the IP’s fees to cover the set up and administration costs are taken as part of the funds that are available to the creditors.

Residual debt

It is quite likely some of your debt will still be outstanding when your five-year repayment period is finished and your IVA is discharged. These remaining debt amounts will be written off with no further payment required from you. This happens because, when they gave their initial approval, your creditors would have accepted they were unlikely to get the full debt repaid, and thus a binding IVA guaranteeing at least partial payment of the debts was their best available option. Your name is also removed from the Insolvency Register at this point.

IVA risks

Though an IVA fairly reflects your circumstances and can be flexible, it is never an ‘easy’ option and there are risks to consider. For example:
• Any savings you have must be used to settle your debts.
• Any increase in your income may increase your payments.
• If you benefit from an inheritance, or similar ‘windfall’ it must be used to repay your debts.
• Any private pension payments you have may also have to be used to repay your debts.
• If you are a home-owner, you will probably be required to re-mortgage your property to release equity.
• If you don’t abide by the IVA terms it could mean you face bankruptcy.

So if you are at the stage of asking yourself what is an IVA it is always important to take proper debt advice so you are fully aware of the circumstances and the implications for you.

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