Individual Voluntary Arrangement
Individual Voluntary Arrangements are an alternative solution to bankruptcy. IVA allows you to make agreements with the people you owe money so you could reach a final legally binding settlement. IVA replaces all your current payments with one affordable monthly payment which is paid over the period of 5 years. After that time any remaining debt is written off and you become completely debt free.
Here is an example of how debt management plan could make your debts affordable:
|Currently monthly repayment||£179|
|Credit card A||£2,500|
|Credit card B||£1,000|
|Store card A||£1,000|
|Store card B||£500|
After a debt management plan
|New monthly repayment||£73|
What is Individual Voluntary Arrangement?
Individual Voluntary Arrangement (IVA) is a legal and formal contractual agreement between the person in debt and the creditor. It may also work as an alternative for individuals to avoid bankruptcy. Normally, the arrangement lasts for 5 years, during which the debtor is expected to pay a single, reduced, affordable, monthly payment. After this period is over, the unpaid part of the debt is written off by the creditors, which allows the debtor to cut off up to 75% of his debts. During the repayment period all interest charges are frozen and all demands for money are stopped, which means creditors are not allowed to contact the debtor directly.
How does it work?
First of all, the Individual Voluntary Arrangement has to be set by a licensed professional called an Insolvency Practitioner (IP), who then administers the arrangement.
Once the proposal of the debtor is approved, his financial situation is assessed, and the repayment amount is calculated - IVA starts to be legally binding. After the term of agreement finishes, if an applicant kept up all the repayments - he will be free from his debts regardless of how much has been paid off.
That is important to mention that IVA helps individuals clear their non-priority debts only. These are: credit card debts, store card debts, overdrafts, unsecured loans, etc. This also means that only unsecured debts included within the IVA may be written off at the end of the period. Such priority debts as: government fines, child support payments, mortgages, court fines, and secured loans cannot be included in an IVA, so as they cannot be written off.
IVA advantages and disadvantages
The biggest advantage of an IVA is that debtors can avoid loosing their property and yet pay off debts through a monthly affordable payment, which is calculated by assessing the financial situation of an applicant.
Also, among the financial advantages of IVA, there is the fact that further interest cannot be applied to the owed amount, once the lender and debtor have come to an agreement on the monthly repayment amounts.
With the help of an IVA, the debtor may have control over his assets (house in particular), and may not lose it automatically compared with Bankruptcy.Among the disadvantages of an IVA, there is a risk that the agreement is made on the basis of monthly payments that cannot be afforded in long term, which means that the payments have to be set as realistic as possible. If the debtor does not keep to the terms of the IVA, the creditor or the Insolvency Practitioner have a right to put him under a bankruptcy.
If creditors do not accept the IVA proposal, debtor is back to the initial point, where he continues carrying his debts.
Finally, if the circumstances of a debtor changes and he can no longer afford the repayments, his IVA may end if the IP cannot persuade the creditors to accept a new agreement.
IVA compared to debt management plan
The major difference between IVA and debt management plan is that even though the debt management plan may greatly reduce the repayments of a debtor each month, he will still have to pay all of his debt back, which may last for quite a long period of time. While with the IVA, as we have already discovered, it usually lasts for approximately 5 years.
Unlike debt management plan, once an IVA is approved - interest stops and the debtor will be free of unsecured debts at the end of its period, even if creditors have only had back a fraction of what they were owed. While with debt management plan creditors do not necessarily have to stop adding interest.
Finally, with the DMP creditors are able to break the agreement at any time and ask for increased payments or add further interest.
What you should remember?
An IVA may only be appropriate solution for people who can commit to making regular payments for the full duration of the agreement. Individual Voluntary Arrangement may be a suitable option for an individual having the following characteristics:
- Debt amount, in total, should be equal to or exceed £15,000;
- Having 2 or more creditors (companies owing money to);
- Having a regular income;