Individual Voluntary Arrangements (IVAs) explained

Agreeing an IVA can freeze your interest and charges, whilst cutting down the overall amount you repay.

IVA or individual voluntary arrangement is a popular alternative to bankruptcy because they are a less severe and less restrictive solution to debt problems, but you need to get IVA advice to understand them properly.

In this short guide we take a look at the benefits and drawbacks of an individual voluntary arrangement and explain how you can get one so you never have to wonder 'what is an IVA' again.

What is an IVA?

Individual Voluntary Arrangements are a UK government-backed scheme to help people who have overwhelming debts. In practice, an IVA is a debt management agreement between you and your creditors (creditors are the organisations you owe money to).

The IVA defines how much money you'll repay your creditors over a fixed term and allows you to avoid the stigma of bankruptcy and its associated penalties.

IVAs are typically arranged over a five-year period. Interest and charges on your debts will be frozen during this period and any money that you haven't paid back after five years is then written off.

This means that with an IVA, you may well pay back less than the total amount you owe. Your monthly payments will be based on what you can afford, so an IVA will make sure that you have enough money to pay for essential things like rent and food.

IVAs are arranged for you by an insolvency practitioner. Your insolvency practitioner will offer you IVA advice and manage your IVA for you.

Who can get an IVA?

An individual voluntary arrangement may be right for you if:

• You owe more than £15,000 (to two or more creditors).

• These debts are unsecured. E.g. credit card debts or personal loans (You can still get an IVA if you have a mortgage or secured loan, but these will not be included in the IVA agreement).

• You owe money to two or more creditors (a credit card and personal loan with one bank is counted as only one creditor).

• You're struggling to reduce your debts.

• You are a resident of England, Wales or Northern Ireland. If you live in Scotland a Protected Trust Deed is equivalent to an IVA.

The benefits and drawbacks of an IVA

Before you decide if an IVA is right for you, think about the benefits and drawbacks.

The benefits of an IVA:

• An IVA is less severe and less stigmatising than bankruptcy.

• An IVA is more private than bankruptcy, which is announced publicly.

• You may be able to keep assets such as your car or house.

• Where you have a business you can continue to trade.

• IVAs are usually limited to 5 years. After 5 years you'll be debt free.

• Your IVA is tailored to you, so you'll only pay back as much as you can afford. This often reduces the total amount you pay back.

• An IVA prevents further legal action from your creditors and stops threatening letters and phone calls.

The drawbacks of an IVA:

• Your credit rating will be negatively affected.

• You'll either need a lump sum or regular income (such as a salary) to get started.

• You can still go bankrupt if you don't keep up agreed repayments.

• Where your circumstances change and your insolvency practitioner can't get your creditors to agree to new terms, your IVA will end.

• You may need to remortgage your home or take out a secured loan against it in order to release equity to pay your creditors.

How do you get IVA help?

Talk to an insolvency practitioner about your debt problems - they will take a detailed look at your situation and help you to decide if an IVA is the right option.

If an IVA is the right choice for you, the insolvency practitioner will guide you through the application process, gather all the relevant information and put together an IVA proposal, which has to be approved by your creditors.

A creditors' meeting will be held, where they can vote either for or against the arrangement, and an IVA will only be approved if creditors holding at least 75% of your debt vote in favour of it.

Getting an IVA if you've got a mortgage

Mortgages and other secured loans aren't part of an IVA, so unlike bankruptcy, you should be able to keep your home, as long as you earn enough to meet the monthly repayments.

However, during your IVA (usually in the fourth year) you may be asked to release a significant chunk (up to 75%) of the equity tied up in your home, with a remortgage or secured loan. Alternatively, if you are unable to get a remortgage or secured loan, your IVA may be extended for an extra year.

What happens after the IVA is completed?

Once you've completed all the repayments agreed in your IVA, your insolvency practitioner will issue a Certificate of Completion and send it to the Insolvency Service, so they can update your records.

It is also recommended that you send copies of your Certificate of Completion to credit reference agencies (e.g. Equifax, Experian) so they know that you've successfully completed your IVA.

Your finances after IVA help

A record of your IVA will stay in your credit history for six years - one year longer than the IVA itself will last. Getting an IVA does not mean you will be on a 'credit blacklist' - once your IVA is completed, you will be able to start to rebuild your credit history.

As time passes and you demonstrate the ability to control your finances, your credit rating will improve and your ability to get credit will slowly increase. Find out more about how to improve your credit score.