If you’re struggling with debt repayments, making an Individual Voluntary Arrangement (IVA) may be one way to take back some control of your finances. But IVAs aren’t suitable for everyone. Here’s what you should know about them.

What is an IVA?

A legally binding agreement between you and the creditors you owe money to, an IVA is a form of insolvency. If you can show you have a regular source of income, it can be used to pay off several types of unsecured debts. These include credit card and store card debts, overdrafts, Council Tax arrears, personal loans and hire purchase debts. It can also be used to pay off income tax and National Insurance contribution debts. A single IVA can be used to pay a combination of debts, making it easier for you to manage your finances.

There are some types of debts you can’t pay off with an IVA, including child maintenance and Child Support arrears, student loans, magistrates’ court fines and some types of car finance. Other types of debts involving your home, such as mortgage and rent arrears as well as loans that have been secured against your property, may be covered by an IVA, but these applications often fail because many creditors refuse to agree to them.

How does it work?

An IVA can only be set up by a qualified insolvency practitioner. Together with your insolvency practitioner, you’ll come up with a proposal to take to your creditors based on how much you can afford to pay, which they may or may not agree to. The proposal will involve making set repayments over a 5 or 6-year period, with any money you owe after that time being written off. You may also qualify for an IVA if you have a lump sum to pay towards your debts.

Making an IVA can be helpful because it effectively freezes your debt. So once your creditors have agreed to it, they won’t be able to add any more interest or charges to your debts and they won’t chase you for any more payments or take any court action, in fact they’re not even allowed to contact you.

It also means you must stick to the agreed repayments during the term of the IVA – if you don’t, your IVA may be cancelled and you could be made bankrupt. 

Where are IVAs available?

You can make IVAs in England, Wales and Northern Ireland. If you live in Scotland, the corresponding solution is called a protected trust deed. This is similar to an IVA, but the repayment term is 4 years instead of 5 or 6.

What’s the catch?

While an IVA may sound like an ideal solution to many debt problems, there are possible consequences if you make one. For instance, your credit rating will be affected for 6 years from the date the IVA starts. And if you have any outstanding hire purchase agreements, these may be affected too.

You also may not be able to take out a loan or any other debt for more than £500 until the arrangement is finished. If you did want to get more than £500 of credit, you must get written permission from your insolvency practitioner, unless the credit is for public utilities such as water, gas or electricity.

Details of your IVA will appear on the Insolvency Register, which can be viewed by anyone, including members of the public (details only appear while the IVA is current). And if you receive any extra money in the form of an inheritance, bonus or other windfall, it’s very likely you’ll have to pay these into your IVA.

In some cases, having an IVA can affect the terms of your employment. If you’re unsure about this, check your contract or speak to your HR manager before taking any further steps.

You’ll also have to pay your Insolvency Practitioner’s fees, which are usually taken from your monthly repayments (though the good news is there won’t usually be any payments to be made before your IVA has been set up).

Will it affect your home?

If you rent your home an IVA shouldn’t make any difference to your tenancy. And if you’re a homeowner, it’s unlikely you’ll have to sell your home. You may be required to remortgage your property in the final year of your IVA, depending on how much equity you have (the money released may be used to pay into your IVA).

This is still usually a better solution than bankruptcy, which often forces individuals who have equity in their home to sell up.

How can you get one?

If you think an IVA may be suitable for you, it’s a good idea to start by getting some free debt advice to make sure it’s the most appropriate solution for your circumstances.

At CABA, our specialist debt advisors can help you to get your finances back on track – and they’re just a phone call away. For advice and information call +44 (0) 1788 556 366 or chat to an advisor online 24 hours a day.

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