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IVA Early Settlement
Your financial circumstances might change during the course of your IVA and you might find yourself in the position where you could potentially increase the monthly payments towards your debts, or even pay off your remaining debts to all your creditors at once.
In this guide, we’ll explore the issue of paying off an IVA early, including whether it’s possible if it’s a good idea, and how you might go about paying off your IVA early if you found yourself with enough money to do so.
Can I finish my IVA early?
In a word, yes. There is no restriction on the minimum length of an Individual Voluntary Arrangement (IVA). While most people in an IVA take between five and six years to repay lenders through their agreement, debt solutions don’t necessarily have to take that long.
The length of the IVA will be dependent on your personal circumstances and the size of your monthly payments. These are worked out by your Insolvency Practitioner, a debt professional licensed by the Insolvency Practitioners Association, based on what you can afford at the time.
How do I pay off an IVA early?
You will need to offer your creditors a lump sum as a one-off payment, and agree that no more monthly payments are required. They will then accept this as settling the debt and the IVA will be closed.
If you want to pay off your IVA early then you need to first suggest this solution to your IP (insolvency practitioner). If they think it is possible that your creditors will agree to early settlement, they will set up something called a variation meeting. This is arranged when you want to propose a significant change to your IVA arrangement.
Like the original proposal, 75% of your creditors by value who vote on your variation, have to agree to a variation on your IVA before it can go ahead.
You could look into remortgaging your home early to settle an IVA. However, you will usually be asked to try and remortgage six months before your IVA ends anyway, which many people find difficult and why many home-owner IVAs are extended to the last six years.
What is a full and final settlement?
A full and final settlement is a lump sum of money that you can offer your creditors so that it can be put towards your debts. If your creditors accept your proposal, you can end your IVA early.
It’s up to you to decide how much money to offer your creditors. How much that depends on various factors, including who your creditors are, how big the lump sum is, and your chances of being able to pay off the full amount over time.
You shouldn’t offer to pay the full amount in your settlement – if your lump sum is large enough, your creditors are likely to agree to a debt write off for the remaining money you owe.
That said, you should offer as close to your total debt as you can afford. By agreeing to a settlement offer, your creditors are accepting a loss on your debts- the closer the offer is to the total amount you owe, the more likely each creditor will be to accept your offer.
What happens once I make an offer to settle my IVA early?
Approach your Insolvency PractitionerAny decision to pay off your IVA early will need to go through your Insolvency Practitioner. They will consider whether to move ahead with the early payment based on whether they think your creditors will agree to it.
Variation meetingIf your IP decides you have a realistic chance of your proposal being accepted, they will set up what’s known as a variation meeting. This gives creditors the chance to review your proposal. If 75% of your creditors agree to a payment plan, it will be agreed upon by other creditors.
Pros and Cons of Settling an IVA Early
- You are no longer bound by the constraints of an IVA and are no longer required to provide proof of your income and expenditure each year.
- Should you receive a pay increase or receive any windfalls after it has settled, the money is yours to keep.
- You can start to rebuild your credit score. Although it may be a slow process, it allows you a head start before the IVA drops off your credit report.
- Although you have paid off your IVA early, it will still be listed on your credit report for six years from the date of approval.
- It may still affect your ability to get credit, and it is unlikely that you will be able to obtain large amounts of credit, such as a mortgage, straight away.
Is it a good idea to settle my IVA early?
There are many reasons why it might be a good idea for you to settle your IVA early. You get to enjoy the freedom of not being constrained by the terms of the IVA. You can start rebuilding your credit score more quickly.
Even if your proposal for paying your IVA off early is rejected, it is possible to continue your IVA payments as previously agreed, meaning you won’t be any worse off than before.
All that said, you should always seek debt advice and talk to your Insolvency Practitioner before making any serious change to your IVA agreement, as they’ll be able to give you a better idea of how the proposed changes will be received by your creditors.
If I pay my IVA off early, will it impact my credit score in the same way?
Unfortunately, settling your IVA early won’t prevent the arrangement from affecting your credit score. A settled IVA will still be listed on your credit report for at least six years from the date it was approved.
During that time it’s unlikely you will still be able to obtain large amounts of credit, such as a mortgage or certain credit cards, straight away. The good news is the earlier you end your IVA, the quicker you’ll be able to begin repairing your credit score and getting yourself back on track.
What funds can be used to settle your IVA early?
In most cases, the money is gifted by a family member or friend. In some circumstances, usually after 3 years of being in your IVA, you can get a loan to pay your IVA off early which also helps to build up your credit score again as well as releasing you from your IVA. This must be something you discuss with your Supervisor and seek independent advice on, as you entered into an IVA to regain control of your finances. Getting a loan to get out of your IVA early shouldn’t put you in a position where you are struggling again.
If you receive a windfall during your IVA, it will normally have to be paid into the arrangement in full. The injection of the extra funds does not automatically reduce the length of the agreement, and you have to continue making your monthly payments.
However, depending on the amount paid in as a lump sum it may reduce the length of the IVA if you are able to pay your creditors back in full, plus your IP fees. If this happens you will not need to have a variation and your IVA can simply be completed.
Before agreeing to an IVA, consider the following things:
- Are you ready and willing to commit to paying a monthly amount?
- Do you accept that you’re entering into a legally binding arrangement?
- Are you willing to release equity and sell assets of significant value?
- Do you understand that an IVA might negatively affect your credit file for six years?
- Is an IVA the right solution for your needs?