Money Guide

IVA guide

Total UK personal debt increases by £1 million every four minutes and unsurprisingly, the number of people becoming insolvent increased by almost 60 per cent last year (Credit Acrtion, 2007).

As more people faced ever-mounting debt, more people have begun to seek individual voluntary agreements (IVAs) as a way of avoiding bankruptcy. Originally created in the 1980s as an alternative for businesses facing bankruptcy, they are becoming increasingly popular among people unable to solve their financial problems.

What are IVAs?

If you’re considering declaring yourself bankrupt, but run your own business or work in an industry where you would lose you job if declared bankrupt – such as in accountancy or in the armed services – then perhaps an IVA would work as an alternative for you.

IVAs are agreements that you make with your creditors to avoid bankruptcy. You would agree to pay a certain amount each month (usually at least £200 a month) for no more than five years, or a one-off lump sum (e.g. from remortgaging your home) and your creditors would agree to write off the rest of your debt.

Any agreements made need the approval of a court and would be supervised by an insolvency practitioner.

Will it help me?

IVAs can work well – they can cut debt by up to 75 per cent in some cases – but only for people in the right circumstances. For example, you need to be able to afford a lump sum payment or at least £200 a month, and many people facing bankruptcy can’t afford this.

Also, IVAs don’t cover money owed on secured debts such as mortgage repayments, or usually Council Tax, rent arrears and fines (such as parking tickets).

What does it cover?

An IVA can reduce all your unsecured debts on things such as:

Store cards
Catalogues
Credit cards
Personal loans
Student loans
Overdrafts
Outstanding balances after home or vehicle repossession
Business loans for which you are personally liable

Do I have to pay for an IVA?

You will have to pay your insolvency practitioner and by law you need one to propose an IVA to your creditors – you can’t do it yourself.

How they charge you will depend on the practitioner though many will include their fee in your agreed monthly repayment, so you won’t be paying any extra each month. But check before making any agreements and always shop around for a reputable insolvency practitioner as fees can be very high and will be wasted if you pay upfront and then the agreement fails. Your local court should be able to help you find a practitioner.

What are the benefits?

More than 6,000 people enter into IVAs each year for the following reasons:

You could be debt free within five years. And you will always know where you stand with your debts.
All interest and late payment charges will be frozen.
Once the IVA has been made the law says that your creditors can no longer demand payments either by letter or telephone.
As long as the agreement stands, you are protected from court action by your creditors.
Once your repayments have been completed (this is usually over no longer than five years), your credit rating will be repaired.
IVAs are also private agreements that don’t affect your professional status. So no announcements in the local paper or risk to your job.
An IVA can cut your debt by up to 75 per cent.

What are the disadvantages?

As great as IVAs might sound, there are some rather significant drawbacks:

The release of home equity. This is not guaranteed, but if you do own your home you might be expected to release all or part of it as part of your IVA.
According to the Government’s Insolvency Service there is no minimum or maximum debt amount but you usually need to have at least £15,000 unsecured debt for an agreement to be made.
You will also be expected to be able to pay back at least £200 a month.
No more borrowing. For the duration of the agreement you won’t be able to get any more unsecured credit and all store and credit cards will have to be cut up. However, you might be able to change an existing mortgage or even take out a new one.
They take several months to organise.
You may have to pay a hefty fee to arrange the agreement – typically around £4,000 over the duration of your payments.
Your circumstances may change for the worse before your repayments are finished, making it difficult or impossible for you to complete the agreement – in which case you could end up bankrupt anyway.

How do I qualify?

Firstly, you usually need to have a minimum of around £15,000 debt to secure an agreement.

Also, and crucially, 75 per cent of your creditors – in monetary terms – must agree to the terms and repayment scheme of the IVA. Even if the remaining 25 per cent do not agree, they will be legally bound to accept it.

However, if less that three quarters agree, the IVA will fail and you will have to seek an alternative arrangement, or consider bankruptcy.

IVAs are only really suitable to people who can offer a lump sum and/or fairly high regular monthly repayments. Without these offerings your creditors are unlikely to accept the agreement, leaving you back where you started and possibly even worse off if you paid your insolvency practitioner upfront and then the agreement failed.

Is an IVA right for me?

If you’re still unsure of whether or not an IVA is the right path for you, you can get in touch with National Debtline on 0800 808 4000 for free, confidential and independent debt advice.

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