What is an Individual Voluntary Arrangement?
An IVA is a formal legally binding agreement which allows you make payments towards your debts, over 5-years. Under the terms of the IVA you will make a single monthly payment to creditors, the amount is a percentage of what you owed and is an affordable amount that was negotiated with your creditors, at the end of the IVA term you will be debt free.
An individual voluntary arrangement (IVA) or VA is a formal insolvency process that helps an individual resolve significant debt whereby a deal with the unsecured creditors is proposed to repay the debt over a maximum of five years. The key advantage of an IVA is that it normally involves a substantial discount on the original debt of up to 80 %.
IVAs can be used as an alternative to personal Bankruptcy and are particularly suited to deal with sole trader businesses or a partnership suffering financial distress.
Voluntary arrangements are:
- Intended to encourage creative, flexible and practical ways to avoid liquidation or bankruptcy
- They encourage creditors to work with you to everyone’s benefit
- They allow a period of protection to implement improvements to business of personal cash flow
Losing your home and bankruptcy are not inevitable with insolvency. Even where your liabilities are considerably more than your assets. As any experienced insolvency practitioner will explain. The starting point is persuading creditors to agree to a practical and achievable individual voluntary arrangement (IVA). No more nightmares, just realistic help to get you back on track
Advantages of an IVA
- There are no upfront fees.
- If your IVA is approved, creditors who vote against your proposal or who do not vote at all are still bound by it.
- Creditors whose lending is unsecured can’t take any further action against you once the IVA is approved.
- Interest and charges are frozen by law, provided you keep up your payments.
- The IP will help you prepare your proposal, including agreeing the level of your household and personal spending.
- You make only a single payment each month, which is distributed to creditors on your behalf.
- If your circumstances change a payment break could be authorised or the terms of your agreement could be varied.
- You will never be forced to sell your home in an IVA.
- All remaining debts will be written off at the end of your IVA. Using government legislation, an IVA could help you write off up to 90% of unsecured debt.
Disadvantages
- The terms and conditions of your bank account need to be checked to ensure that it cannot be affected by an IVA in any way.
- If you do not keep to the terms of the IVA then the insolvency practitioner (IP) or your creditors can take further action against you, for example by making you bankrupt.
- If creditors do not accept the IVA proposal, you are back to square one and your creditors can carry on trying to pursue you for your debts.
- If you paid an up-front fee for your IVA and it is not accepted, then you will have lost the fee and may be in a worse position than when you started.
- If you own your house, you may need to re-mortgage your home as part of the IVA. If you are unable to do this you may have to pay extra into the IVA, or in rare cases you may lose your home.
- If you rent your home, check the terms and conditions of your tenancy agreement. It may say that your landlord can end your tenancy if you enter into an IVA. Even if your tenancy agreement does say this, your landlord may choose not to end your tenancy, especially if you are up to date with your rent payments.
- There is a risk that the IVA is agreed on the basis of monthly payments that you cannot afford over a long time. You must be very careful that the payments are set at a realistic amount in the first place.
- If your circumstances change and you can no longer afford the payments, your IVA may end if the IP cannot persuade the creditors to accept a new agreement.
- The IVA will be recorded on your credit reference file for six years and can affect your ability to get further credit.
- When you set up an IVA, you will need to open a basic bank account which is separate from all your debts. A basic account does not offer any credit facilities, such as an overdraft. Some banks may not allow you to continue to operate a basic bank account whilst you are in an IVA
- Spending restrictions are put in place during an IVA.
Types of IVA’s
There are different types of IVAs available for a range of different circumstances:
Self-employed
An IVA for a self-employed person works in the same way as an IVA for an employed individual. The insolvency practitioner will put together an agreement of affordable monthly payments based on your income and expenditure. However, there are some differences to be aware of:
- Seasonal income: Self-employed IVAs are typically written to be more flexible, which is particularly helpful when it comes to businesses with a more seasonal income. A cashflow statement will need to be prepared to enable the insolvency practitioner to understand how much you can contribute.
- Business credit: If you need to obtain credit to continue running your business throughout the agreement this can be pre-agreed with the creditors included in your proposal. This will be subject to agreed criteria and parameters. Creditors will normally allow business credit provided it is repaid the sooner of 30 days or the invoice terms.
- Excluding trade creditors from the IVA to allow future trading: A self-employed individual may require the ongoing supply of goods or services from an unsecured creditor and including this creditor in the IVA may severely impact the ongoing business relationship. Under these circumstances, it’s possible to propose that certain trade creditors are excluded from the IVA and will receive ongoing payments towards their debts.
Joint IVAs
- Couples can set up two IVAs that are administered as one once they have been accepted by creditors.
- Joint debts will be included in both arrangements.
- This allows the household to make one affordable payment to all creditors through the IVAs.
Full and final IVAs
- An option for those who wants to offer a one-off payment to creditors as a full and final settlement.
- This could be a viable option if you have sufficient savings or are in the process of selling an asset which will release funds for your unsecured creditors.
- It’s also open to those who have a family member or friend who is prepared to provide third party funds to cover the total amount of the IVA.
Partnership voluntary arrangement
A Partnership Voluntary Arrangement, or PVA, is an agreement with unsecured creditors to repay a proportion of business debts. It can be a useful tool to encourage viable partnerships back to profitability.
It is imperative that a Partnership Voluntary Arrangement is only agreed upon if the partnership itself is a viable business – or where the partnership has a number of valuable and disposable assets that could be realised to raise capital in the short-term and provide a boost to cash flow.
Partnership Voluntary Arrangements can only be used by partnership businesses which are viable or that have disposable assets that can be turned into cash in the short-term to keep the business running. If the business isn’t viable then it should be wound up to generate the best possible return for the creditors.
IVA Helpline
Your insolvency practitioner works out what you can afford to repay and how long the IVA lasts. You’ll have to give details about your financial situation, for example your assets, debts, income and creditors. Your insolvency practitioner will contact your creditors. The IVA will start if the creditors holding 75% of your debts agree to it. It will apply to all your creditors, including any who disagreed to it. This helpline will assist you getting a good nights sleep!
