An individual voluntary arrangement, commonly referred to as an IVA, is a formal and legally binding agreement between a person and their creditors to pay back their debts over a period of time. This arrangement is primarily designed for individuals in the UK who are struggling to pay off their unsecured debts.
What are IVAs for?
The primary goal of an IVA is to offer a solution to those facing significant financial difficulties, providing a structured repayment plan that is more manageable than juggling multiple payments. The process begins with the debtor seeking the guidance of a licensed insolvency practitioner (IP). This IP acts as the proposal’s supervisor and will assess the individual’s financial situation to determine if an IVA is suitable. Once the IVA is proposed, it requires approval from creditors representing at least 75% in value of the total debt for it to become binding.
What are the benefits of an IVA?
Several benefits come with entering into an IVA:
- Fixed duration: Typically, an IVA lasts for 5-6 years. Once completed, any remaining debt is written off.
- Predictable payments: Payments are based on what the debtor can afford. They are made monthly and go into a pot, which the IP then distributes among creditors.
- Protection from legal action: Once approved, creditors cannot take further legal action to recover the debt, and any ongoing actions like wage garnishments are stopped.
- Interest and charges freeze: The interest and charges on the included debts are frozen once the IVA is in place.
💡 Read more: How much does an IVA leave you to live on?
What are the drawbacks of an IVA?
However, it’s worth noting that an IVA also has its downsides. It will negatively impact your credit rating for six years from the start date. There is also a risk of home equity being released if one is a homeowner, which may mean remortgaging. If the IVA fails, creditors can restart recovery actions, or the debtor might be pushed towards bankruptcy.
To summarise, an IVA is a formal debt solution in the UK, offering a structured and often more manageable way for individuals to settle their unsecured debts. While it comes with its set of advantages, such as predictable payments and protection from legal actions, it’s vital for individuals to understand its potential implications on their financial status, especially regarding their credit rating and property. Before committing to an IVA, it is advisable to seek professional advice to understand if it’s the right solution for one’s specific circumstances.
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