An IVA is a proposal by an individual to their creditors to pay off a proportion of the debts that are owed to them. An IVA will usually require the individual to make contributions over a period specified in the proposal, usually up to 5 years, so that creditors will receive a percentage of their debt by way of a dividend. In addition, if the individual owns a house then they will also need to provide a percentage of their share of any equity in the property to the creditors. The individual must also pay all their new debts as they fall due.

The concept of an IVA is that creditors would receive a more beneficial payment than would be likely in the event that the individual becomes bankrupt. A proposal is drafted by the individual, although in practice will normally be drafted by the nominated supervisor, based on information provided by the individual. The proposal sets out the individuals circumstances, assets and liabilities, and the manner in which they propose to deal with their creditors.

If necessary, an application for an interim order can be made before the individuals proposal is considered by the creditors. That stops the commencement or continuation of any legal process against the individual or their estate until the creditors have chance to consider the proposal at a meeting of creditors.

In order for an IVA to become binding it must be accepted by at least 75% in value of those creditors voting at a meeting of creditors. It is a flexible procedure and creditors can accept, amend or reject a proposal. The approved IVA is binding on all creditors.

Once the individual has met their obligations under the IVA then, with certain exceptions, they are released from their debts to their creditors bound by the arrangement. The exceptions are any creditors who hold security (legal charges) over their assets, student loans, fines, debts arising from family proceedings and Department of Work and Pensions (DWP) budgeting and crisis loans.

If the individual cannot comply with the terms of their IVA then they may end up being made bankrupt, and their situation may then be worse than if they had entered bankruptcy without first attempting an IVA.

Advantages

  • IVAs are generally more suited to those individuals who have high value assets, such as expensive vehicles or property, which they want to protect. This is because, unlike with bankruptcy, these assets are not placed at direct risk under an IVA.
  • IVA’s have no impact upon a person’s career. Bankrupts are also prevented from joining the armed forces or police force, or from becoming the director of a company. They are also often prevented from taking jobs related to accountancy and law. In most cases, IVAs will not affect your job in this way.
  • An IVA allows you to make one affordable monthly payment.
  • The interest on your debts is frozen as at the date of the creditors meeting convened to approve the IVA.
  • All legal actions cease.Once an agreement is reached, as long as repayments are met, there is no threat of further action from creditors.
  • IVAs offer fewer restrictions when it comes to accessing credit than bankruptcy. An IVA will be logged on your credit file for a period of six years.

Disadvantages

  • Not all debts can be included in an IVA, such as court-imposed penalties/fines.
  • Although an IVA can technically be any length, it will usually lock the debtor into monthly repayments over a period of several years, with five years being the most common time frame. By contrast, bankruptcy is usually discharged after a year.
  • Any improvements to income during the IVA period may lead to an increase in repayments and any bonuses or inheritance received must also be declared and you could be expected to pay any windfall into your IVA.
  • IVAs are recorded on the Personal Insolvency Register, which is available publicly.
  • Homeowners entering into an IVA should be aware that they will be expected to release any available equity for the benefit of their creditors. Due to credit scoring it may be that the terms of such an arrangement are less favourable.
  • For an IVA to be accepted, 75% of the voting creditors by debt value must approve the arrangement.

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Specific advice should be obtained before taking action, or refraining from taking action, on any of the issues covered above.

For further information, please contact one of our Client Services Team who will be able to assist you.