Your current credit (e.g. credit cards and store cards) will be inactive and you will not be allowed to take additional unsecured borrowings until your IVA is completed. In fact, it is possible to take or change a mortgage even while you are still within an IVA but you will need to make sure you get the advice of your Insolvency Practitioner for this.

When you are in an IVA you won’t have to sell your property. However you may be required to release equity by taking out a re-mortgage in the last year.

During the course of the IVA your contributions will go towards a creditor pot. The money in the pot will be handed over to the creditors at yearly intervals, and at the end of the 5 year term all outstanding debts are written off. This pot is looked after by the IP. Once the IVA has started this pot does not belong to the debtor but to the creditor. IP fees are agreed to and paid for by the creditor out of this pot.

This figure will depend on your personal circumstances and will be agreed between you, the IP and your creditors. It all depends on your monthly disposable income left over after your monthly needs are calculated.

The simple answer to the question is no – not everyone can enter an IVA. An IVA (Individual Voluntary Arrangement) is a formal debt solution involving insolvency. The debtor needs to demonstrate that they don’t have enough disposable income in order to meet contractual repayments and not enough assets to sell to clear the debt.

If you have  any savings, shares etc. you will be expected to offer these to the creditors through the IVA. Home owners will be asked to find out how much equity is in their property (or properties) by obtaining an estate agents valuation and mortgage statement. The value of any car(s) will be noted and valuable ones may need to be downsized with the profit offered to creditors. If the value of the assets significantly exceeds the value of the unsecured debts, then it is likely that an IVA will not work. Creditors will conclude that the debtor has the ability to clear the whole debt.

These IVA’s are proposed on the basis of the debtor having little or no disposable income to offer in an IVA, but do have access to a lump sum to offer. As such the IVA can be completed very quickly and the debt settled. Note however that the fact the debtor has undertaken an IVA remains on the debtor’s credit file for the same length as all IVA’s, namely six years.

The usual length of an IVA is 5 years. As long as payments into the IVA have been regularly made, then it is likely that all remaining debt will be written off at the end of the 5 years. There are occasions where creditors insist upon a sixth year for IVA payments. This could be in lieu of equity in a property that cannot be released, or becomes the sums being offered within the IVA provide such a low dividend to creditors that they expect the length of the IVA to be increased.

An IVA repayment period can be extended if the creditors require the term to be varied. An example of this happening would be if some IVA payments are missed and have to be added on to the IVA, thus increasing the length.

Creditors clearly want as much of their debt back as possible. The debtor can only afford to make a certain level of payment and therefore creditors want this payment to last as long as possible. However it was felt that a cut off point was necessary or the IVA would become unreasonably burdensome on the debtor. Seven years was decided upon as a maximum length but in practice, creditors are satisfied with five (occasionally six years) of repayment.

Please see our full page of IVA cost breakdown here

Agreeing a repayment level

When an IVA is proposed, an expenditure budget is created that should provide for actual outgoings where known and allowances for other expenditure. All reasonable contingencies will be considered and included. The debtor should only agree to the IVA if they feel they can live within the budgetary framework. If there are anticipated changes of circumstances within the lifetime of the IVA, these should also be factored in.

Unexpected outgoings

By definition, no one can predict the unexpected. Serious car problems or house repairs can become a major problem when there is no provision for such expense and there is no credit option to take. Alongside the 1-off expenses, regular outgoings can increase – mortgage or rent payments, insurance costs etc. When the unexpected happens, the debtor in the IVA should discuss the problem with their Insolvency Practitioner (IP). It’s in no-one’s interests for the IVA to fail, so if possible a solution will be found. This may involve taking a payment break for a month or more from the IVA. In the case of a regular increase in outgoings it may be possible to reduce the IVA payment level.

Unexpected loss of income

Very few jobs are completely safe these days. The loss of income is a serious worry for those who have entered a formal IVA process. If this happens, as above, the loss should be discussed with the IP. It may be that another job materialises fairly quickly and a payment break can put the IVA on hold and the length extended to allow for this.

Despite everyone trying to find workable solutions to the above problems, sometimes IVA’s fail due to changing circumstances. When this happens, the debtor is left with the debts and an alternative solution needs to be found. Very often bankruptcy is the most obvious way forward. However it may be possible to make token payments to creditors until a further change of circumstances takes place and a new IVA could be proposed.

The IVA principle

The basic principle behind an IVA is that the debtor will do the best they can to repay as much of their debt but for a fixed period. Creditors trust an Insolvency Practitioner (IP) to recover as much of the debt as is reasonable, and ensure fairness towards both debtor and creditors.

Known changes during an IVA

Sometimes IVA’s are presented with a known pay rise in the pipeline or a reduction in outgoings that will increase the debtor’s disposable income. For example, there may be arrears of rent/mortgage or council tax to clear. This is built in to the expenditure budget of the debtor as an expense. However once the arrears are paid off the assumption will be that available income for the IVA will increase. The same applies to a HP arrangement such as a car. As the amount owing to the HP Company is secured on the car, the debt cannot be included in the IVA. Allowance can be made within the IVA to continue paying this, but once completed, the assumption will be that the IVA payments can increase.

What if I have a pay rise?

If someone in an IVA receives a large pay rise it is appropriate to inform the IP. Assuming outgoings have not also increased then the available income for the IVA will also increase. If a pay rise is relatively small, then the increase may simply offset increased cost of living. The IVA payment level can be assessed at the annual review.

What if I have a bonus and overtime

If overtime is guaranteed it is normally built in to the IVA as income. Most overtime along with bonuses are not guaranteed so the IVA payment level can’t be based on these. However when overtime pay or bonuses are received then this constitutes new income and enables the debtor to pay more of the debt back. The normal arrangement is that the debtor is allowed to keep the first 10% of their basic monthly salary and 50% of the remainder is offered to the IVA. The practical arrangements for handing over this extra payment will be discussed with the IP.

What if I win a windfall

The normal arrangement is that windfalls (inheritance, lottery win etc.) will be handed over to the IVA up to the full amount of the debt plus IP fees.

What are unsecured debts?

You can – indeed must, include all unsecured debts in an IVA. This will include credit and store cards, catalogues, bank loans and overdrafts, credit agreements and certain types of arrears. You will include business debts that you are personally responsible for. Though for some reason you may want to keep a particular unsecured debt out of an IVA, this is not possible as it would be showing preferential treatment to a particular creditor.

What about Tax and VAT?

One of the advantages of an IVA compared to a Debt Management Plan is that HMRC debts such as income tax and VAT can be included in the agreement. This can make an IVA a very appropriate solution for people who run their own business and have become personally liable for unpaid income tax, PAYE or VAT. Directors who have given personal guarantees on company debts will include them in an IVA.

Can I include a mortgage or secured loan?

A mortgage or secured loan cannot be included in an IVA and nor can any arrears that have accrued. For this reason an allowance for the required monthly payments towards your mortgage and any secured loans must be included in your monthly outgoings budget. If you have a shortfall on a mortgage or secured loan following the repossession of a house you no longer own, the debt effectively becomes unsecured and will be included in an IVA.

Can I include HP or mobile phone contracts?

A car HP or lease agreement is secured against your vehicle and cannot be included in an IVA. Like mortgages and secured loans, failure to maintain payments will lead to repossession and a following debt. However if you decide you can no longer afford to maintain your car payments, you can stop the payments and give the car back. Any outstanding debt you are liable to pay can then be included in an IVA. You can do the same thing with a mobile phone contract you no longer need. Again, the debt can be included in the IVA, though obviously you can no longer use the phone.

When debts are unmanageable?

When our debts become too large or too many to manage, or we find that we have been relying on further credit which is no longer available, or a change in our circumstances means we have to adjust all our finances, we may need professional help. Explaining our situation to a debt advisor or Insolvency Practitioner (IP) will provide us with information regarding the options to us given our specific circumstances.

Is an IVA the right solution?

Once we have evaluated our options, it may be that an IVA seems the right way forward. The advantages are obvious – one affordable monthly payment to cover all unsecured debt, a definite end point to the debt, legal protection from creditor action etc. However an IVA is not an automatic solution – creditors need to accept an IVA proposal from a debtor through an IP.

What is the criteria for acceptance by creditors?

We should be able to give a good indication of the likelihood of an IVA being accepted as creditors have made those criteria known. When an IP agrees to put an IVA forward, again it’s a strong indicator that the IVA is likely to succeed. Creditors clearly want as much of their debt back as possible, but when the likely return to them in an IVA is likely to be more than they would receive in a bankruptcy situation, the IVA is probably the best solution for them. The key components in the decision-making process are:

1. a) Insolvency – creditors want to see evidence that the debtor cannot afford to pay their debts back either through monthly payments or by selling assets.
2. b) Debts – usually the unsecured debts need to be at least £8,000
3. c) Creditors – if there are at least 2 creditors and at least 3 lines of credit this part of the criteria is acceptable. However less creditors or lines of credit can still be considered for an IVA.
4. d) Assets – if a debtor has assets of significant value then the creditors may consider bankruptcy a preferable option. E.g. someone with £50,000 of unsecured debt, offers £250 pcm in an IVA, but has £40,000 of equity in their property. They are insolvent (debt is more than assets) but creditors may conclude that bankruptcy would provide a better return than an IVA.
5. e) Repayment plan – creditors may feel an IVA is inappropriate if the debtor is able to clear their debts within 5 years. E.g. if someone owes £15,000 and has £300 pcm disposable income. The £300 may not be enough to meet the contractual repayments, and they may be insolvent, creditors may conclude that a repayment plan such as a Debt Management Plan could clear the debt in less time than an IVA.

Joint IVA’s

Strictly speaking an IVA is an individual arrangement (hence Individual Voluntary Arrangement). However where a married or co-habiting couple are both debtors (either each has debts or there are debts in joint names) then it is usual to prepare an interlocking IVA – as finances are clearly intertwined.

Single IVA’s

Where one person in a relationship is the debtor it is likely that the assets and disposable income belonging to the other person should be protected. It may be that the one without the debt has benefitted equally from the debt and this may be considered when assessing what is fair. However legally the debt belongs to the named person, and it is their IVA and not the spouse/partners.

Do I need to disclose partner’s income?

The usual answer is yes – if only to demonstrate how the household finances work. If the debtor was unable to repay their debts because they were paying all household bills, whilst the partners was working but not contributing then creditors of the debtor would be less than impressed. So – total household income/outgoings usually need to be disclosed.