How do I become debt free with an IVA?

Entering into an Individual Voluntary Arrangement (or “IVA” as they’re more often referred to) can be an extremely liberating experience – particularly if you find yourself having to juggle monthly finances, aren’t quite sure what you owe and to whom and have generally got yourself into a financial mess … which certainly isn’t too difficult to do, particularly given other daily demands, all of which can prove to be extremely stressful and time-consuming at the best of times.

For many individuals, an IVA makes for the perfect solution to get back on track within just five years and best of all, consolidates all debts into just one affordable monthly payment.  Sounds too good to be true?  It’s honestly not.

What is an IVA and how does it all work?

Put simply, an IVA is a legally binding agreement which is made between you and your creditors.

To enter into an IVA, a suitably qualified person (usually a lawyer, accountant or insolvency practitioner) will take details of all your outstanding debts and then categorise them into both ‘priority-debts’ and ‘non-priority’ debts.

‘Priority debts’ are the type of debts which are considered to be the most serious (and/or with the most serious consequence should you fail to pay them); such as mortgage or rent repayments, child maintenance repayments, Court fees, HMRC debts and so on.

‘Non-priority’ debts, on the other hand, are usually ‘unsecured debts’, such as catalogue debts, credit card or loan repayments etc.  That’s certainly not to say they’re no longer important.  It just means that they take less priority than the essential things you need for day-to-day living, such as accommodation and essential living expenses.

Once these debts have been classified your chosen advisor will work closely with you in order to agree a proposed repayment plan.  This should ultimately reflect an amount which is affordable (for you) but also realistic (for submission to your creditors).  In order to enter into an IVA, at least 75% of your creditors must agree to the terms of it so it’s important to put something forward which they’ll give serious consideration to and not simply make a frivolous and/or unreasoned proposal since this is likely to get rejected at the first hurdle.

What’s the eligibility criteria?

In order to receive IVA Advice you’ll need to have at least two separate debts totalling more than £5k.  These will usually have been incurred during the past 6 years so that they’re not ‘barred’ under provision of The Limitation Act.

When considering an IVA, you chosen specialist will usually discuss any ‘disposable income’ you might have (i.e. from which you can make repayments) and will also make sure you can firmly commit to the proposal you’re intending to put forward.  You must also remember that the cost to enter into an IVA can be as high as £5k so it’s important to consider this element too, since the cost of this will be incorporated into your monthly repayments.

Progressing your IVA forward

Once you’ve given careful consideration to the implications of an IVA and what it might mean for you given your individual circumstances, your advisor will ask for documentary evidence of your debts.  This might typically include some (or all) of the following:

  • Copy pay-slips, proof of benefits (e.g. Universal Credit) or details of any other income;
  • Copy bank statements (including current and savings accounts);
  • Copy mortgage statements; a copy of your tenancy agreement and/or a letter from your landlord to advise whether or not your rent payments are up-to-date;
  • Details of any assets you own (for example, any vehicles, shares, ISA’s or any savings you might have);
  • Full details of who you owe money to and (if known) what the current outstanding amount is;
  • Details of your monthly income and outgoings.

Once this information has been provided then your advisor will apply to the Court for an ‘interim order’.  This means that your creditors will have to stop taking any action against you whilst the IVA is being put into place.  For most, this offers a great peace of mind since creditors will then be unable to contact you, either by post or telephone, chasing you for payments and/or asking for your proposals to repay the outstanding amount.

Thereafter, your advisor will prepare a full report based on the information you’ve provided to him or her and this will typically include:

  • Full financial disclosure of your income, outgoings, assets, properties and debts;
  • Proposals for repayment of the outstanding amount (this is usually based on a repayment period of between 3 and 5 years but will vary in each instance, depending on your personal circumstances);
  • A reasoned argument as to why your creditors should accept the proposal being put forward. Remember, 75% of your creditors must agree to you entering into an IVA so this element of your case is extremely important since any reluctance to accept your proposal could mean you having to consider other alternatives (such as bankruptcy) instead.

Once this information has been disclosed, your advisor will arrange for a creditors’ meeting to take place (which is usually held at their offices) and it’s certainly advisable that you attend this meeting in order to endorse your commitment to the proposals being put forward on your behalf.

What happens at the creditors’ meeting?

Once notification of the creditors’ meeting has been issued to all parties concerned they can either elect to attend in person or send a representative.  Many creditors have signed up to an IVA protocol which, in essence, contains guidelines on how an IVA proposal should be drawn up and is intended to make the whole process much easier for all concerned.  That said, any creditor can suggest changes to the proposal; although you do have to agree to them and certainly shouldn’t be forced into a financial position which is unrealistic, since this defeats the whole object of entering into an IVA in the first place.  Remember, 75% of all creditors have to agree to the proposal (otherwise known as a ‘requisite majority’) and this is based on the value of debts owed.  So, if a given creditor is owed 30% of the total debt amount their vote will count as 30% of the total vote.  Once the vote has been decided it will be reported to the Court.

What happens once the IVA is approved?

Once everything has been approved the arrangement is legally binding on all parties and your chosen advisor will be responsible for managing it going forward.  Thereafter, you’ll simply pay one monthly amount to your advisor and they will then distribute dividends to your creditors.

Should your circumstances change whilst the IVA is in place then it’s imperative that you notify your advisor of this since this may potentially affect the arrangement, although it’ll also be reviewed on an annual basis to ensure its effective management.  However, all being well – and depending on the amount of months the IVA runs for – you should be debt free by the end of it and can then start to rebuild your credit history through future months and years.