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Is an IVA the best thing to arrange when in debt?
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Is an IVA the best thing to arrange when in debt?

If you’re drowning in debt, it can feel like there’s no way out. For many, an individual voluntary arrangement (IVA) is a suitable way to become debt-free and restore your freedom. We explore whether an IVA is the best option when in debt, how to organise an IVA, and the costs involved. Before signing up for an IVA, we recommend you get impartial and independent advice that can help you to achieve the best in your financial future.

What is an individual voluntary arrangement (IVA)?

An individual voluntary arrangement (IVA) is a formal agreement between a borrower and their creditors.

An IVA can be used to repay all forms of debt, including:

  • debt from credit cards
  • bank accounts (including overdrafts)
  • credit agreements
  • personal loans (both unsecured and secured loans)
  • mortgage arrears
  • rent arrears
  • utility bills
  • Council tax bills
  • mobile phone bills

 

An IVA isn’t necessary to pay off student loans, as these debts are repaid as part of your taxable income. An IVA is suitable for those people with multiple creditors and substantial debts (typically £10,000 and over). If you need more information, check out our article that answers the question: is an IVA worth it.

An IVA is legally binding, which means that if repayments aren’t made, your IVA could be at risk.

 

An IVA must be arranged by an insolvency practitioner (IP), typically either a lawyer or accountant. An insolvency practitioner will work with you and your creditors to develop an IVA proposal. The IVA proposal details how the debt will be repaid, including monthly payments that need to be made and other requirements (such as selling a home to repay a proportion of the debt, for example). The money paid will go to your insolvency practitioner each month, who will distribute it to your creditors, ensuring you pay your debts.

Insolvency practitioners don’t work for free (something we cover below), but the good news is that any fees are included as part of the IVA itself and don’t need to be repaid separately.

One of the most significant benefits of an IVA is that they enable you to spread repayments over an agreed period. In many cases, an IVA will last for five years (60 months) from the date it starts. But there is no set timeframe. In fact, your IVA can last up to ten years. To learn more about how long IVA’s last and whether you can extend your IVA read our detailed blog.

Repayments can take the form of lump-sum payments, regular monthly payments, or a combination of both.

Some of the benefits of an IVA include:

  • A route map to financial freedom. Individual voluntary arrangements can give you clarity and confidence about the future. Supported by your insolvency practitioner, you can plan for life after your debts have been repaid.
  • It’s a legally binding agreement. This means that creditors can’t chase you for unpaid or outstanding debts for as long as the IVA is in place.
  • You only need to pay the IVA for the length of the term. In most cases, this is five years but it can be extended in some circumstances.
  • You’ll only repay part of the debt you owe rather than all of it. This reduces the amount you need to pay in total.
  • You won’t go bankrupt. An IVA will stop you from becoming bankrupt, with all the damage to your personal reputation, credit rating, and life.

Is an IVA the best option?

So, we’ve sketched out the benefits of an individual voluntary arrangement, but it is right for you?

Entering into an IVA is a legally binding agreement, which comes with some significant roles and responsibilities. Here’s why an IVA might work for you.

An IVA may the best solution for you if:

  • You have a debt of £10,000 or more. If your debts are lower, you may find it’s better to look at other debt management options.
  • You owe money to two (or more) creditors. An IVA enables you to pay off debts from multiple creditors. If you owe money to a single creditor, it may be more suitable to agree on a repayment plan.
  • You want to be free from dealing with your creditors. The stress of dealing with debts can cause significant damage to mental health and wellbeing. An IVA can release you from the stress, strain and worry of dealing with your creditors.
  • You can make the repayments. To maintain the IVA, you’ll need to make regular repayments according to the agreed schedule. You’ll need to have a reliable source of income and confidence you can maintain this before agreeing to an IVA.
  • Your financial situation will remain stable. If you’re expecting your income to change during the repayment period, think seriously before entering into an IVA. Failing to make repayments can affect your IVA.
  • You’re serious about protecting your financial future. An IVA provides a way to become debt-free, but it’s a long-term commitment that you must stick to. If you can, you’ll find it provides a great way to restore your finances and freedom.
  • You want the opportunity to repay your debts early. If you come into money (known as a windfall), you can use this to reduce – and in some cases, clear – your IVA early. You can also save up your spare income to make additional repayment, should you wish. Declaring bankruptcy, for example, will stay on your credit file until you are discharged.

Before committing to an individual voluntary arrangement, we suggest you explore all options available to you.

Entering an IVA shouldn’t be taken lightly, and there are some consequences that you must be aware of before you go ahead:

  • It will affect your credit rating. An IVA will be recorded on your credit record, which will affect your credit score. This will affect your ability to get credit in the future, such as applying for a credit card or loan. An IVA will sit on your credit file for six years, regardless of whether you repay it early or not.
  • You may be required to sell your home. Creditors may insist that you have to sell off your assets, including (in some cases) your home.
  • You will lose all savings. Creditors will expect you to use all savings you have to pay off some of your debts.
  • Your IVA could be at-risk if you cannot make repayments: If you miss several payments, your insolvency practitioner may issue a warning or even terminate your IVA.

Is IVA or debt management plan better?

Debt management plans are an alternative way to repay your debts. Before you go ahead with an IVA, you should explore what options are available, including debt management plans.

Whether a debt management plan is suitable depends on the type of debt you have, your circumstances, and your ability to pay. Let’s look at the details.

A debt management plan may be suitable if:

  • You only have one creditor. An IVA is suitable if you have two or more creditors. For example, if you only owe money to one company, a debt management plan could be your best option.
  • You are confident at negotiating with your creditors. If you choose to get an IVA, you’ll work with an insolvency practitioner who will help you plan a route to becoming debt-free. If you arrange a debt management plan, you’ll have to do this alone.
  • All your debts are unsecured. You can’t use a debt management plan to pay off debts secured to your home, such as your mortgage, rent, or certain types of loans. If you have secured debts, you’ll need an IVA.
  • Your total debts are under £10,000. A debt management plan is only suitable for smaller debts. If your debts are over £10,000, you could be better off with an IVA.

Is an IVA a bad idea?

Is an IVA a bad idea? This all depends on you, your debts, and your financial circumstances – including your ability to repay.

As we’ve explained previously, an IVA is a binding financial agreement that commits you to make regular monthly payments over a prolonged period. If you can make the payments, it provides an effective way of clearing your debts.

Depending on the amount of debt you have and the type of debt (unsecured or secured), there may be more suitable options available to you.

Before making any decisions, we recommend you speak to someone about your financial circumstances and get some debt advice.

How much do individual voluntary arrangements cost?

There are two costs involves in individual voluntary agreements: debt repayments and insolvency practitioners fees.

Debt repayments are cash that’s distributed to your creditors. This will go to repaying the debts you accrued.

Your insolvency practitioner will charge a set fee to set up an IVA. This represents the work they do negotiate on your behalf with your creditors. They also charge a fee for managing the monthly transactions, including sending money to your creditors.

The good news is that the fees charged by your insolvency practitioner are included as part of your monthly repayment, not added on top. This means that your monthly payment won’t increase at all during the IVA repayment period.

Do I qualify for an IVA?

An IVA is a suitable debt solution to help you manage your money and become debt-free. You can use our online IVA calculator to assess how much debt you can consolidate into an IVA. You can also calculate estimated monthly repayments and speak to an advisor who can help you take the first step toward debt freedom.