How does an IVA work?
Rather than making separate payments to each creditor, you make a single monthly payment to an Insolvency Practitioner (IP) based on what you can afford. An IVA typically lasts for five to six years. Upon successful completion of the IVA any remaining unsecured debt included in the arrangement is legally written off.
The IP holds a meeting with your creditors, usually virtually to allow your creditors to consider your proposal and give their views on whether they will accept the terms of the IVA. For the IVA to be accepted, creditors representing at least 75% of the creditors in value that vote on the day of the meeting are required to agree to the arrangement.
Creditors may not approve the IVA. If the required value of creditors agree to the proposed IVA, the arrangement is binding on all creditors included, even if any creditor voted against it.
The IP takes your payment and distributes it proportionally between your creditors in line with the terms of your approved proposal. There are fees involved, but the fees are taken from the payments you make and will be discussed with you.
Who Manages an IVA?
Your IVA is set up and supervised by a licensed Insolvency Practitioner, a qualified and regulated professional. The IP handles all communication with your creditors, carries out annual reviews of your finances to review your required repayments, and ensures you comply with the terms and conditions throughout the arrangement.
What Happens to My Debts Once an IVA Is Approved?
- Interest and charges on included debts are frozen.
- Creditors liaise with your IP about your debts included in the IVA.
- Creditors will still send statements but must not contact you about payments.
- The creditors included in your IVA cannot take legal action against you.
Who Qualifies for an IVA?
To be eligible for an IVA, you must:
- Live in England, Wales or Northern Ireland
- Have a regular source of income.
- Owe more than £7,000 in unsecured debts
- Have at least £100 per month left over after essential living costs
If you live in Scotland, different solutions apply.
What Kinds of Debt Does an IVA Cover?
An IVA deals with unsecured debts, things like credit cards, personal loans, overdrafts, HMRC liabilities, council tax arrears, and payday loans. Secured debts like mortgages, Hire Purchase, student loans, and court fines cannot be included.
Will an IVA Affect My Credit Rating?
Yes, it will negatively impact your credit rating. An IVA is recorded on your credit file for six years from the date it’s approved or until it ends, if this is more than 6 years in term.
As you do not maintain the contractual payments to your unsecured debts your accounts will default. A default notice will remain on your credit file for 6 years.
An IVA will also appear on the Insolvency Register which is a public register.
What are Other Risks to Consider with an IVA?
An IVA can be a helpful solution, but it’s important to understand the additional risks before making any decisions.
- If your IVA fails, you could face bankruptcy. If you’re unable to keep up with the agreed payments and the arrangement breaks down, there is a risk of bankruptcy.
- Homeowners may need to release equity. In the final year of your IVA, you may be required to remortgage to release equity towards your debts. Any remortgage may attract higher interest rates than your current deal. If a remortgage is not available, the IVA term may be extended by 12 months.
- Your spending will be restricted. During the arrangement, you’ll be expected to live within an agreed budget. Any significant change in your financial circumstances will need to be reported to your insolvency practitioner.
- Only included debts are written off. Any unsecured debts not included in your IVA at the outset will remain outstanding at the end of the arrangement.
- Other options may suit you better. An IVA is one of several debt solutions available. Depending on your circumstances, a different option may be more appropriate.
Is an IVA Right for Me?
That depends entirely on your situation. For some people, it can provide a structured way of managing debt, while for others a different solution may be more appropriate. Getting regulated advice is the most important first step.
If you’d like to understand the options available, we’re here to help. To speak to one of our advisors confidentially, call us on 0161 868 2500. You can also complete our online debt help form or get in touch with our team.
We provide no-obligation advice to anyone who requires debt advice. All options will be explored, and we will help you find the solution best suited to your individual circumstances. We are a commercial organisation and if you choose a solution we provide, fees will apply.
The information above is an overview of how an IVA works, the potential benefits and drawbacks. For free and impartial debt advice, visit www.moneyhelper.org.uk.
