What is an IVA?
A lot has been written about Individual Voluntary Arrangements over the last few years and the question we probably get asked more than any other is what is an IVA?
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and the people you owe money to. IVAs were originally intended as a mechanism for dealing with ‘business generated’ personal insolvency, although in recent years, they’ve become increasingly popular with individuals.
In return for paying back what you can realistically afford each month (after living costs and essential expenditure has been accounted for), usually for a period of five years (you may also be required to release any equity that is available in your home – only if you can afford to), your creditors will agree to freeze interest and write off any outstanding debts. An IVA will also prevent your creditors from taking any further action against you (including petitioning for your bankruptcy) and will allow you to keep your home.
If you’ve been researching ‘what is an IVA?’ then the chances are that you’ve already encountered some unrealistic claims about what IVAs can actually achieve. Some organisations claim that IVAs can write off up to 90% of your debt. Whilst this can happen in extremely rare cases, in reality, an IVA will write off between 50% and 60% of an average debt of just under £60,000. Such a typical IVA would mean a reduction in the money owed to between £25,000 and £30,000. How much debt is written off depends on your circumstances.
IVAs are only suitable for people with larger debts (typically over £15,000) and you need to be sure you can stick to a planned budget for five years.
Before entering into an IVA, you also need to be aware that fees are involved. However, as these are paid by your creditors to your Insolvency Practitioner (the person that manages the IVA process on your behalf) out of the money that you contribute each month, the reality is that they won’t affect you. Essentially, your creditors are agreeing to accept less money back in order to pay your IP. The only exceptions to this are if you have a significant windfall during the IVA and are able to pay back your debts in full or if your IVA fails. In these circumstances, your creditors may require you to contribute an amount to cover fees on top of your debts.
IVAs are a lifeline for many tens of thousands of people in the UK each year. However, entering an IVA has significant professional and legal implications, which must be fully understood before any decision is made.
Debt Advice Foundation is a registered UK charity offering free, confidential support and advice on any aspect of debt. You can read more about IVAs and whether they are suitable for your situation in our IVA section. If you need advice on any aspect of IVAs, please call 0800 043 40 50.