You’ve seen the ads on the Internet:

Get Out of Debt Today!

New Government Plan to Reduce Your Debt!

Pay Back Pennies on the Pound and Eliminate Your Debt?

Be Debt Free With Just a Few Simple Steps!

Most of these ads are referring to what is called an IVA or Individual Voluntary Arrangement.

Individual Voluntary Arrangements or IVA’s were born out of the Insolvency Act of 1986 and are a way for someone who is struggling with their debts, or may be insolvent and facing bankruptcy, to come to an agreement with their creditors to repay their debts.

What is an IVA?

In the simplest terms, IVA’s are a formal arrangement between you and your creditors where you make payments of what you show you can afford for a period of five years. At the end of the five years any remaining balances on the accounts is written off and you are debt free. Should you own any property with equity, you can be required to buy-out the IVA in the fifth year by releasing some of that equity.

IVA’s are for unsecured debts, you cannot include secured loans such as a mortgage in an IVA. You also cannot include student loans.

Now, let’s look at IVA’s in more detail.

Setting Up an IVA

IVA’s are set up and handled by Insolvency Practitioners or IP’s; they are the ones that actually put forth the IVA proposal to your creditors.

There also may be an intermediary that handles the paperwork involved, and helps to qualify you for an IVA. In many instances this may be a debt advisor.

Initially, an interview is done via the phone or in person to determine the level of debt you have and what your looking to do, besides sort out all the debts. What do you want to accomplish, your goals. Then a detailed income and expenditure form is completed, this will show what you may have as a surplus to fund an IVA.

Payments to an IVA are based on affordability, what you can afford each month after your allowed living expenditures. There is a minimum threshold of payments most creditors will accept, and as long as you can meet this minimum, an IVA can be put forth.

Once it has been established that you have the level of debt required to do an IVA, a detailed income and expenditure form is completed outlining all your income and expenses. This form shows your monthly expenses such as rent or mortgage, council taxes, food, petrol, electricity, gas, TV licence, insurances, cable, Internet, etc, all your monthly bills minus your debts. It also shows all your wages, tax credits, any benefits, you receive. Once the math is done, subtracting your bills from your wages, the amount that is left, the surplus income, is what is considered for payment into an IVA.

There is a minimum required payment to an IVA, this is based on the level of debt you may have and also what the final return may be to your creditors. In most instances creditors are looking for a 25% return as a minimum. This means that they hope to get 25% of the total balance owed to them back during the course of the IVA.

Once the monthly payments has been determined, proposals are put together and put forth to all your creditors to vote on. As long as the majority of your creditors agree to the proposal, the IVA is carried forward and it is binding to all your creditors.

The accounts are then frozen to any interest and new charges, and you begin making your monthly payments. You make these payments for a period of five (5) years, at which the end of the five years, any remaining balances on the accounts are written off, and you are debt free and starting out fresh.

Eligibility For An IVA

Fees

There are fees involved in doing an IVA. However, these fees are a part of your payments each month into the IVA. You are not required to pay any amounts above and beyond the IVA payment. The fees are known and agreed to by your creditors.

Bankruptcy – IVA’s – Credit

Both bankruptcy and being enrolled in an IVA are forms of insolvency. In bankruptcy you are asking the courts to intercede on your behalf between you and your creditors. In an IVA you are having an Insolvency Practitioner do this for you.

If you are enrolled in an IVA you will be listed on the insolvency register, just a someone who is bankrupt would be. The listing will reflect that you are in an IVA.

insolvency register, list of those in debt, black list, black listed

Since being in an IVA is a form of insolvency it does affect your credit. Then again so does being in arrears, so the issue of an IVA affecting your credit is moot as your credit has already been damaged.

Everything stays on your credit history for six (6) years, then drops off. Once you complete the IVA, it will show on your credit history for another 12 months.

terrace homes, owning property if insolvent, losing my house in bankruptcy, going bankrupt with property

IVA’s and Property

If you own property and are insolvent, being in an IVA can help you preserve the property and not lose it. If you were to go bankrupt and own property with any equity, the property may be taken and sold. An IVA is a way to keep your property.

If you own property and enrol in an IVA you will be expected to release a portion of that equity in the fifth and final year of the IVA. This release of equity will be outlined in the IVA and is usually done by re-mortgaging the property.

How much equity are you expected to release? As much as possible that keeps within the guidelines for the re-mortgage and what you can afford. You would not be expected to put yourself in an unaffordable situation.

If the situation arises that you cannot re-mortgage to release any equity, for whatever reason, the IVA payments can be extended an additional six (6) to 12 months, after the fifth year. These payments are instead of the equity release.

Advantages and Disadvantages of an IVA

Advantages:

Disadvantages:

Failing An IVA

In most instances if three (3) consecutive payments are missed the IVA can be deemed as failed. Once the IVA fails any money paid into the IVA is essentially lost as it has been paid out to creditors and for fees.

Your creditors could then also petition for you to be made bankrupt, which may be why you entered into an IVA in the first place.

If you are struggling with IVA payments you do have some options:

Complition of an IVA

Once you have paid into the IVA for the five years, and if required did an equity release, the IVA is seen as paid. Any remaining balances on the accounts is written off and you are debt-free.

How Many People Complete Their IVA’s?

It is a high percentage of those that do complete the IVA. For the years 1990 – 2004 almost 70% of those that started an IVA completed it. In 2003 and 2004, that number dropped to 65% and 61%. From 2005 onward the statistics show lower, as many of those IVA’s are still ongoing and have not finished yet.

Differences Between an IVA and a Debt Management Plan

Another option is resolving any debts a person may have is a Debt Management Plan.

Debt Management plans or DMPs are an informal arrangement between you and your creditors allowing to make payments each month of what you can afford.

In certain situations a Debt Management Plan may be a favoured choice over an IVA, such as in the instance someone has a property with more equity then debt. An IVA would not be accepted as the creditors would simply state, sell the property and pay us in full.

The major difference between an IVA and a Debt Management Plan is that there is no concession on the balances, or amount owed is there is in an IVA. In a Debt Management Plan you continue making payments of what you can afford until the balance(s) are paid in full.

Debt Management Plans do offer more flexibility that IVA’s, in that if you cannot afford to make a payment one month, or the monthly payment will be less than agreed, you can do this. With this flexibility comes the unfortunate side-effect that your creditors may begin collection actions against you.

Both IVA’s and Debt Management Plans affect your credit.

DMP’s and IVA’s an Overview

Debt Management Plans:

Individual Voluntary Arrangements:

* Need a minimum of £12,500 of debt.

Individual Voluntary Arrangements have been, and still are, a vital way for people to get out of debt, avoid bankruptcy, and retain their property.

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