Individual Voluntary Arrangements (or IVAs) can help you get your finances back on track by making regular monthly payments to your creditors (lenders you owe money to) until your debts are cleared for a brighter financial future.
It is a popular debt solution for people struggling to pay their debts with agreed payments, such as a percentage of your monthly salary or a single lump sum, made until your IVA term comes to an end which, compared to other debt solutions, can be within a relatively short space of time.
If you are considering an Individual Voluntary Arrangement, you must seek debt advice beforehand to ensure you meet the eligibility criteria and your financial situation unlikely to improve in the near future.
In this guide, we’ll talk you through Individual Voluntary Arrangements, including what they are, how they work, and how long they last, so you can find out everything you need to know and decide whether it is the right debt management solution for you at this time.
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement is a legally binding agreement between you and your creditors to repay your debt through regular affordable payments over the course of a fixed period.
It freezes interest and charges on your unsecured debt and can prevent any action (such as taking you to court for defaulting on your debt) from being taken against you whilst you are actively making payments with your creditors clearing any outstanding debt upon successful completion of your IVA.
They were introduced as part of the Insolvency Act of 1986 and have become one of the most common debt solutions for debtors facing bailiff action or bankruptcy.
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How does an IVA work?
An IVA can only be set up and managed by an Insolvency Practitioner (IP) licensed by the Insolvency Practitioners Association.
They will establish a suitable repayment plan (how much your monthly payments will be and how long you will make payments for) with payments based on your individual financial circumstances and monthly payments split between your creditors.
They will also act as an intermediary between you and your creditors to ensure all parties are happy with the proposed terms with 75% of your lenders required to agree before the IVA can commence.
There are, however, some exceptions when it comes to the debts that can be repaid with an IVA with student loans, child support, and current utility bills not included.
How long does an IVA last?
The length of an IVA will differ depending on your individual circumstances, but the standard term is five years.
If you miss payments or reduce your monthly payments, however, your IVA term can be extended to six years (or however many is necessary) to cover the arrears.
It can also be extended to six years for people with no equity in their homes or people with over £5,000 equity that are unable to remortgage their home when their five-year term comes to an end.
Under the Insolvency Act of 1986, however, they can legally last between three months and seven years.
How long does an IVA last for homeowners?
If you own property, this can impact the length of your IVA as you may be required to remortgage your home in order to continue making monthly payments. This depends on how much equity is in your home.
If your property has a minimum of £5,000 of equity, for example, you must release the equity towards your IVA in the final year of your arrangement.
If your home cannot be remortgaged, however, your IVA will be extended by another 12 months to last six years instead of the standard five years.
How much equity do I need to end my IVA in year 5?
It is possible to end your IVA and have your unsecured debt cleared after five years if your home has negative equity or positive equity below £5,000.
If your home has positive equity above £5,000, however, the Equity Clause will be triggered, and you must attempt to release up to 85% of your share of your property’s value through remortgaging or a secured loan.
To find out if you are eligible, you will be required to re-assess the value of your home in the 54th month of your IVA.
What is the Windfall Clause and how does it impact my IVA payment term?
If you come into a large lump sum of money (known as a windfall) at any point during your IVA, it must go towards repaying your debts under the Windfall Clause.
It should have no impact on the length of your IVA payment term, but you will be expected to pay it directly to your Insolvency Practitioner to be split amongst your creditors.
If the lump sum is large enough to clear your existing debts, however, you can leave your IVA early with any remaining money returned to you and your IVA considered complete.
If you receive a lump sum payment during your IVA term but don’t inform your Insolvency Practitioner, you run the risk of breaking the law with a windfall considered a change in your financial circumstances.
There are also some exceptions when it comes to the payments that can be accepted as windfall with redundancy pay and insurance payouts not included.
How we helped Paige
It was literally the best decision of my life, and it has actually changed my life, cheesy as that sounds, it has changed my life.
Paige , IVA Customer
Can you pay off an IVA early?
There is no set length that an IVA has to be under the Insolvency Act of 1986, but it is possible to pay off an IVA earlier than the standard five-year term. This is known as early settlement and can help you get your finances back on track and rebuild your credit score earlier than expected.
75% of your creditors must, however, also agree to you paying off your IVA early just as they would have agreed to your original IVA term.
This is not always an option with other debt solutions but can allow you to have greater financial freedom sooner as you will no longer be required to provide proof of your annual income and expenditure.
Using a lump sum payment
If you have received a lump sum payment, you can use it to pay off your remaining unsecured debts and close your IVA.
To settle your IVA early with a lump sum payment, you must bring this to the attention of your Insolvency Practitioner. If your offer is reasonable and likely to be accepted by your creditors, they will schedule what is known as a variation meeting to discuss a change to the original terms of your arrangement.
The amount of money you propose must, however, match your remaining debt as closely as possible to ensure your creditors are not left out of pocket by your early settlement.
Full and final settlement offer
It is also possible to pay off an IVA early with what is known as a full and final settlement offer.
This is when a third party proposes a lump sum payment to your creditors upfront. It tends to be the preferred option for creditors because it prevents them from having to wait until the end of the IVA term to receive the money they are owed.
If the amount of money you offer is deemed too small, however, it may be rejected by your creditors.
It is also worth remembering that even if you leave your IVA early, your details will remain on the Individual Insolvency Register for three months from the date of completion.
Does an IVA impact your credit rating?
All debt solutions will have an impact on your credit rating and an IVA is no different. This is because, by appearing on your credit report, it can lower your credit score and make it difficult to get credit or borrow money down the line.
If banks or lenders wish to check your eligibility for credit during this time, they will be able to search your credit file by visiting any of the main credit reference agencies (Experian, Equifax, and TransUnion) and find out that you have entered into an IVA.
How long does an IVA stay on your credit file?
An IVA stays on your credit file for six years from the date you were initially approved so if your IVA lasts five years, it will remain for another 12 months after the date of completion.
It will also stay on the Individual Insolvency Register for three months with this information maintained and updated by the Insolvency Service and your details removed upon successful completion of your IVA.
Where can I get debt advice to help me decide if an IVA is for me?
If you are in debt, you may be wondering whether an IVA is the right insolvency solution for you at this time.
Before you enter into an IVA, you must seek free debt advice and ensure your financial circumstances are unlikely to change in the near future with the average IVA lasting between five and six years.
If you don’t qualify for an IVA or are anticipating a change in your financial circumstances, there are other debt management solutions available, such as a Debt Relief Order (DRO), that may be better suited to you.