Here's what you need to know about an Individual Voluntary Arrangement (IVA).
What is an IVA?
An IVA is an agreement that is made with your creditors to pay off your debts over a set period of time and is one option you can use to pay off your debts. It is a formal, legal debt solution. This means it is approved by the court and your creditors have to stick to it.
An IVA is a form of insolvency but it is different to bankruptcy. It must be set up by a qualified person, called an insolvency practitioner. This will be a lawyer or accountant. The insolvency practitioner will charge a fee for the IVA. Average fees are around £5000.
The insolvency practitioner deals with your creditors throughout the life of the IVA. If you go to a debt management company for an IVA, find out about how much they will charge before you decide. A debt management company is likely to be more expensive because they charge a fee on top of the insolvency practitioner's fees.
How do repayments work?
If you decide to get an IVA, you will work out a repayment plan with the insolvency practitioner. The repayment plan is put to the creditors and if they agree you will pay back a set amount each month, usually for five years.
Your monthly repayment will be paid directly to the insolvency practitioner who will then distribute the money to your creditors. Some of your monthly payment may be kept by the insolvency practitioner to pay for their fees.
Can any of the debt be written off?
If the payments into the IVA are not enough to pay your debts in full, the rest will be written off. The insolvency practitioner should advise you about this. An IVA may be right for you if:
- Spare Income - you have at least £100 spare income each month
- Debts - you have at least two separate debts
- Total - you have debts totalling over £10,000
- Creditors - you have at least two different creditors. Creditors are people you owe money to
- Deal - you don't want to have to deal with your creditors directly
Remember, an IVA can be flexible, so if you don't quite match all of these criteria, you may still be able to get an IVA.
What are the benfits of an IVA?
An IVA is legally binding. This means all creditors have to stick to it and they can't chase you for the debt once the IVA is in force. It is also time limited and you only have to repay for the period of the IVA (usually five years). Furthermore, creditors will usually accept that only part of the debts will be repaid, the rest is written off.
An IVA may not be right for you, if:
- You work as an accountant or solicitor. You should read the terms and conditions of your contract to find out if you are prevented from continuing to work if you get an IVA
- Your circumstances are likely to change. An IVA usually involves paying a set amount to your creditors each month and it will last for a number of years, normally five. You should be prepared to commit to paying a set amount throughout this time. If your income is irregular or you are on a fixed term contract, an IVA might not be appropriate.
- Your debts are less than £10,000
- You do not have any spare income or a lump sum available to pay your creditors
Other things to take into consideration
Before you go ahead with an IVA, find out about the cost and how it may affect your: home, possessions, savings and pension, credit rating.
If you get an IVA, you may need to change your bank account while the IVA is being set up. This is because your bank may be able to automatically take money from your account to pay any unpaid debts. This is called the right to off-set. A bank can only do this if your bank account is linked to the company you owe the debt to.
If your bank is linked to your debts, you need to switch your bank account. That way, your income will be safe. If you're bank account has no links with your debts, you won't need to change it. If you decide to get an IVA, your insolvency practitioner will be able to advise you about this.
IVAs have high costs. This is because they have to be set up by a qualified insolvency practitioner. Costs vary but are around £4000 - £5000 on average. You will usually pay this in instalments as part of your IVA payments.
An IVA can be flexible to suit your needs but it can be expensive and there are risks to consider. For example: your savings and personal pension payments will usually be used to pay your creditors, if you own a home, you may have to re-mortgage it, it may affect your job, for example if you're an accountant or a solicitor, and if your circumstances change, you could struggle to keep up your IVA payments. If your creditors won't accept less, the IVA will fail and you could be made bankrupt.
What happens if I receive a lump sum of money?
You may have a lump sum of money, for example money left to you in a will. This is likely to be included in the IVA. This means you will need to use this money to make your monthly payments to your creditors. You may use a combination of a lump sum and spare monthly income.
If you’re over 55 and have a 'defined contribution pension', you could cash in some of your pension to raise a lump sum for an IVA. However, this would leave you with less money to live on in retirement. You should get financial advice from an independent financial adviser before using your pension to pay off debt. A ‘defined contribution pension’ is based on how much has been paid into your pot, not your salary near retirement.
What about my assets?
Assets are things you own that have significant value, such as a home, land or a car. You don’t need to have any particular assets to get an IVA but they may help you to pay your debts. Assets can be included in the IVA, which means you will sell them and use the money to pay the creditors.
If you decide that an IVA is right for you, your insolvency practitioner will discuss your assets with you and whether you need to include them in the IVA. You must tell the insolvency practitioner about all your assets. If you don’t, you will be breaking the law.
What happens if I own a home?
If you own a home, most IVA agreements include a requirement for you to get a valuation of your home in the final year. If there is equity in the property, you'll usually need to raise a lump sum to put into the IVA by re-mortgaging your home. Equity is the money you'd make from the sale of a property, after any mortgage or secured loans are paid off.
You shouldn't have to sell your home to raise the lump sum. If you think you are being asked to sell your home, get specialist advice straight away. If you can't re-mortgage, you'll continue to pay the usual monthly contributions under the IVA.
When you arrange to meet with an insolvency practitioner to get an Individual Voluntary Arrangement (IVA), there is information you will need to take with you and things to do to prepare. This page tells you what information you need to take with you when meeting with the insolvency practitioner.
Paperwork you will need to take with you:
When you contact an insolvency practitioner to set up an IVA, they will probably tell you what information you need to pass on to them. This is likely to include:
- Proof of your income, such as payslips, benefits letters or recent bank statements
- Proof of savings such as bank statements
- Details of your mortgage or rent agreement
- Information about what assets you own, such as a car, and how much they are worth
- Details of your debts and creditors - who your creditors are, how much you owe and all the letters and papers you have relating to your debts and creditors
- A budget sheet listing all your income and spending
You should make sure you have all this paperwork sorted and ready before meeting your practitioner.
Before meeting with your insolvency practitioner, you should do a budget. This lists all your monthly income and spending. It will help you work out what spare income you have each month to pay your creditors.
Step One: Applying
Your insolvency practitioner (IP) may apply to the court for an interim order to stop your creditors taking action against you while the IVA is being set up. For example, this means they can’t get a court order against you, or try to make you bankrupt. Interim orders are, however, quite unusual and your IP may help you to get any court action adjourned instead.
Step Two: Discuss
Your IP will look at your financial situation with you, including your spare monthly income, savings and assets. Assets such as property or a car may be included in the IVA to raise more money to repay your creditors – most IVAs have a special clause about how your home is treated. Your IP may also suggest that certain assets are not included, for example, a building or van you need to run a business or a car that you need to get to work. Click here for more information on these steps.
What happens during the creditors' meeting?
Once your proposal is drawn up, the insolvency practitioner will call a creditors' meeting. This will usually be held at your insolvency practitioner's office. You should attend so you can represent your own interests. You can usually join the meeting by teleconference if it's easier.
The creditors will either attend in person or send a representative. They will consider the IVA and whether to accept it or not. Many creditors have signed up to an IVA protocol. The protocol contains guidelines on how an IVA proposal should be drawn up. Creditors are expected to accept a proposal that has been drawn up under the protocol and not ask for unnecessary changes to it. The creditors will vote on whether or not to accept the proposal.
Can creditors suggest changes to the proposal?
Creditors can suggest and vote on changes to your proposal, but you have to agree to the changes.
Do all of the creditors have to agree?
Not all the creditors have to agree, for the proposal to be accepted. The proposal is accepted if more than 75 per cent (by value) of the creditors who vote or are represented at the meeting vote in favour. This is called the requisite majority. It is based on the value of the debts owed. For example, if one creditor is owed 20 per cent of the total debt, their vote counts as 20 per cent of the total vote.
Can the decision to accept the proposal be challenged?
You or the insolvency practitioner or your creditors can appeal to the court against an IVA if there was something wrong with the procedure at the creditors’ meeting. For example, where the creditors approved an IVA proposal which contained inaccurate information, or the interests of a particular creditor were not taken fairly into account.
You must put in your appeal within 28 days of the proposal being accepted by the creditors, or the insolvency practitioner's report to the court if one is required. If the court agrees with the challenge, it may: cancel (revoke) the IVA, or suspend the IVA and order another creditors' meeting to consider a new IVA or re-consider the existing one.
What if a debt comes to light that you didn't know about?
If a debt comes to light after the IVA has been set up, you must tell your insolvency practitioner (IP) about it straight away. The law calls these creditors, unknown creditors. The IVA is legally binding on any creditors that are discovered later on. This means they must stick to it and they can’t take any other action against you to get their debt back. Some of your monthly repayment will go to them.
Your IVA must include terms and conditions for how any unknown creditors will be paid if they are discovered later on. Unknown creditors are entitled to receive some of your monthly payments, even if you don't discover them until after the IVA has finished.
Unknown creditors who are not happy with the arrangement that you've made with the other creditors can apply to the court to challenge the IVA. They have 28 days from the date that they find out about the IVA to challenge it. If you don’t think you owe the debt, you should tell your IP this and that you want to challenge it.
What if my circumstances change?
If your circumstances change, you must tell your IP straight away. This includes if you move house, if your work or financial situation changes, or if your income goes up or down. You will usually be able to change (vary) your IVA if your financial circumstances change. For more information, please click here .
How will the payments work?
You will pay one monthly amount to your IP and they will pass that on to your creditors. They may take some of your monthly payment to cover their fees. If you've missed one or more of your IVA payments, you should contact your insolvency practitioner (IP) straight away. Tell your IP why you missed a payment and ask if you can make the payment late. Your IP may accept a late payment if you have a good reason for the delay. For example, if there was a problem with your bank or you were paid late.
What will happen to your assets included in the IVA?
If you have assets included in the IVA, the IP will collect them and sell them. They will then pay the money from the sale to the creditors.
What will happen to your home?
If there is equity in your home, you may have to remortgage it in the final year of your IVA, to raise a lump sum towards paying off your debts.
If your IVA fails, your insolvency practitioner can ask the court to make you bankrupt. If you have a low income and don’t own a home, this may be a good solution for you. There are risks though, so find out about how bankruptcy may affect you before letting this happen. Alternatively, your creditors may try and make you bankrupt. Normally, your creditors would have to give you a warning, called a statutory demand, but they don't need to do this if your IVA has failed. They can ask the court to make you bankrupt straight away on the grounds that you haven’t kept to your IVA.
If you want to avoid bankruptcy, you should contact your creditors straight away. You should try and come to an agreement with them each separately about how you will repay the debt.
If you have debts with creditors that are not included in the IVA, they can still contact you and chase you for that debt. If you have a number of debts with the same creditor and one of these debts is not included in the IVA, they can still contact you about that debt. You may want to think about the best way to deal with debts not included in the IVA.
For more information about IVAs, please click here.
What happens at the end of an IVA?
An IVA will last for a set time, usually five years. When the set number of years have passed, the debts included in the IVA will be discharged. This means you no longer owe those creditors any money. Any leftover debt that has not been repaid is written off.
The record of your IVA will also be taken off the Insolvency Register. If you have debts that can’t be included in the IVA, you'll have to deal with those separately so you need to make sure you have enough money to pay these debts before paying money into an IVA. You may want to choose a solution that can deal with all of your debts together.
For information about the insolvency process contact: 0300 678 0015 the Insolvency Enquiry Line during office hours (9:00 to 17:00, Monday to Friday).
What if I would like to dispute the debt?
However, there are times when you may be able to argue that you shouldn't have to pay the money back. This could be for a number of reasons, including:
- You didn't sign a credit agreement with the lender or someone else signed it
- The lender didn't follow proper procedures, for example, if the credit agreement has something wrong on it
- You were under age when you signed the agreement
- The time limit for recovering the money has run out
- The agreement you signed is legally unfair
- You were forced into signing the agreement against your will
- You didn't understand what you were doing when you signed the agreement because you have a learning disability or mental illness
If you're being chased for payments by a lender or being taken to court, you should check to see whether there are any reasons why you might not have to pay the money. If you think there may be a reason why you don't have to pay the money, you should get help from an experienced debt adviser to see if there is anything you can do about it.
Has the lender followed the proper procedures?
When you borrow money you should be asked to sign an agreement which sets down what both sides are agreeing to. For most credit agreements the borrower also has legal rights (statutory rights) under the Consumer Credit Act.
This law sets out what a lender must do when offering credit. If the lender hasn’t followed the proper procedures, they may not be able to force you to pay back the money you borrowed, or they may need to get permission from the court to force you to pay it back.
A lender may not be able to force you to pay back money you borrowed if it shows the wrong amount of credit, it shows the wrong repayments or they're missed out altogether, it doesn’t contain all the legal notices it should, for example a cancellation notice, and the lender is not FCA authorised to lend money. For more information about what should be in a credit agreement and what notices are required, click here.
If you haven’t got a copy of your credit agreement, you can ask the credit lender to send you one. If you think the lender has not followed the correct procedures, you may be able to make a complaint or argue in court that you shouldn't have to pay the money back. For more information about what to do if you don't think you signed an agreement and how to get hold of a copy of an agreement, click here. For more information about making a complaint or arguing in court that you shouldn't have to pay the money back, see What can you do if you don't think you should pay back a debt by clicking here.
What happens when the time limit for recovering the debt run out?
In law, a lender has a set amount of time to take you to court for a debt. If a lender doesn’t start court action within the time limit, they usually can't force you to pay back the money. The debt is then known as statute barred.
If it's been around six years (five years in Scotland)or more since you've paid any money towards the debt or written to the lender about it, it's important to check what to do next before you contact the lender. This is because if you say the wrong thing, it may affect your right to argue that you don't owe the money. You should check whether a debt is statute barred in the following situations: before you contact a lender to arrange repayment of a debt, or if you're taken to court for money you owe.
If the lender does get in touch with you after six years (five years in Scotland), you should not agree that you owe any money or offer to make payments until you've taken advice from a specialist debt adviser. This will help you to avoid accidently admitting you owe the money when you don't. Once you admit you owe the money, the time limit may no longer apply.
If you think it's been six years (five years in Scotland) or more since you paid any money towards your debt, you should get advice about what to do before you have any contact with the lender. You can get advice from your local Citizens Advice Bureau. To search for details of your nearest CAB, including those that can give advice by email, click on nearest CAB.