IVAs explained
The main objective, here at IVAorg, is to help people understand IVAs.
We believe that once the fundamentals of an IVA have been explained to you clearly, you'll find it easier to determine whether it's the right solution for you.
Outline Of An IVA
An IVA is a formal debt solution that gives someone a chance to reach a new agreement with their creditors that restructures payments on debt they're struggling to maintain.
An IVA normally has a fixed term repayment term of 60 months. The payments are based on affordability and replace the original contractual payments to creditors.
When the IVA finishes any outstanding debts must be written off by the creditors, potentially writing off large portions of the original debt.
This explains why IVAs are often the preferred option when compared to Debt Management Plans (DMPs). In contrast, DMP payments must continue until all the debt has been paid back, potentially adding years to the repayment term.
Legally binding agreement
IVAs form part of the 1986 Insolvency Act and were introduced as a formal alternative to bankruptcy, aimed particularly at those people whose assets or income might be vulnerable to the bankruptcy process.
For the IVA to become legally binding on all creditors, a vote is taken to see how many are prepared to accept the proposed agreement.
If 75% of creditors (in debt value terms) agree to accept the proposal, they all become legally bound by the arrangement. Even those creditors that voted to reject the proposal are legally bound by its terms.
Under the terms and conditions of the IVA, all creditors must forfeit their right to pursue further legal action of any debt recovery.
This is why IVAs are particularly attractive to homeowners. Entering an IVA enables them to reach an agreement with their creditors that protects them from being forced to sell their home.
Available for professionals
An IVA is designed to act as a formal alternative to bankruptcy for those people whose professional code prohibits them from becoming bankrupt.
Members of the Armed Forces, Prison Service, Police Force, some Civil Servants as well as Lawyers, Accountants, Bank Employees and other Financial Industry workers are all prohibited from becoming bankrupt and this explains why so many would prefer the IVA option when financial troubles occur.
Supervision of an IVA
Due to its formal status, an IVA can only be arranged and administered through a licensed Insolvency Practitioner (IP).
The IP's role, initially, is to liaise with the creditors on behalf of the IVA applicant and prepare the paperwork for the proposal.
The IP represents the applicant throughout the initial stages of the IVA process, right up to the Creditors' Meeting, at which approval for the IVA is sought.
Once the IVA is in place, the IP switches role's, no longer representing the applicant directly but, instead, adopting the role of Supervisor, a position similar to that of an arbitrator.
Their primary role now is to ensure that both parties adhere to the IVA's term and conditions.
IVA benefits
Once an IVA has been accepted by creditors it offers several benefits to both sides.
Benefits to the applicant include:
- Affordable payments
The monthly repayments are set at an affordable level, allowing the applicant to continue life without the burden of their debts. - Fixed term arrangement
The IVA agreement is guaranteed to complete after the agreed fixed term and creditors can't simply demand for it to be extended. - Potential debt write-off
If the original debt is not completely repaid within the fixed term of the IVA, creditors are legally obliged to write-off the outstanding balances. - Private agreement
The IVA is a private agreement and, although it is recorded on the IVA register and the applicant's credit file, it is not published in the press. - No impact on employment
The IVA applicant's employers will not be notified of their IVA. Further more, unlike bankruptcy, their tax code will not change either. - Alternative to bankruptcy
An IVA is a legally binding 'formal' alternative to bankruptcy for anyone who wishes to protect their assets and avoid being made bankrupt. - Stops legal action
A creditor can't take legal action against the IVA applicant for the repayment of the outstanding debt once the IVA has been agreed. - Stops creditor harassment
A creditor forfeits their right to communicate directly with the IVA applicant to discus the repayment of the outstanding balance during the IVA. - Annual reviews
Creditors can't simply demand increases to the IVA payments. The affordability of payments are assessed annually by the Supervisor. - Legal protection
Unlike in bankruptcy, the equity in an applicant's home is legally protected through an IVA.
Obviously there aren't so many advantages to be found in an IVA for creditors but, in essence, an IVA will still make financial sense to them.
The benefits to the creditors include:
- Structured agreement
The IVA applicant commits to a structured and supervised repayment schedule, where the creditor receives repayments for little use of resource. - Removes imbalances
An IVA will pay all creditors fairly and without any preferences. Each creditor will receive their fair share through regular pro rata repayments. - Keeps debts under control
The creditors retain the right to petition for a IVA applicant's bankruptcy, should they fail to maintain payments through the full term of the IVA. - Better return than bankruptcy
The creditors can look forward to receiving a stronger financial return than could be expected through the IVA applicant's bankruptcy.
Inevitably there will be a few potential downsides that may be experienced by an individual who enters into an IVA and they are explained here.
The disadvantages of an IVA applicant include:
- Threat of IVA failure
If an IVA applicant continually fails to maintain their regular IVA payments, the supervisor can terminate the IVA which could result in bankruptcy. - Credit rating damage
An IVA applicant will experience complete degradation of their credit rating for up to 6 years from the start of the IVA. - No credit during the IVA
Under the terms and conditions of an IVA the IVA applicant must refrain from seeking any credit greater than £500 whilst in an IVA. - Annual reviews
An IVA applicant will have their IVA supervised via annual reviews throughout the IVA and if they can afford to increase their repayments they will be expected to do so.
Professional IVA Advice
IVAorg are IVA specialists.
All our advice is free, confidential and comes without obligation.
If you'd like to talk with one of the team, please call 0800 856 8569 or, if you prefer, complete this form and we'll call you at your preferred time.
