IVA - Individual Voluntary Arrangement
Online Debt Management Guide - Page 3 of 6:
The Individual Voluntary Arrangement (IVA) is a government scheme to help people out of serious debt problems. The IVA is based on schemes that have been successfully operating in Australia and Canada for several years.
The IVA is a legal process that provides legally binding protection from your creditors by entering into a repayment agreement with them. Whilst in operation, the IVA will be supervised by a licensed Insolvency Practitioner, usually a Chartered Accountant, who initially prepared your proposals for entering into the IVA.
Initially, we will carefully consider your financial circumstances, and come up with the most appropriate scheme for you. We will of course explain how we can help you to become debt-free over a five-year period (60-months), and help you to have up to 70% of your unsecured debts legally written-off. At the same time, you will only have to commit yourself to paying just one affordable monthly payment.
How does an IVA work?
A licensed Insolvency Practitioner (IP) will supervise the IVA arrangement. The IP, or your Supervisor, is responsible for all the payments required under the terms of the arrangement. You will normally be required to make regular monthly payments, usually over a five-year period, after which any balances remaining on your debts will be legally written off.
If you are a homeowner, you will normally be required to release any available equity from your property. This will usually be achieved by arranging a remortgage or secured loan, the proceeds of which will be paid to your creditors in part-settlement of your debts.
Once your IVA is agreed, all interest and charges on your unsecured debts are frozen. Your Supervisor is required to review your financial situation at the end of each year, and as a result, the Supervisor may require that your monthly payment is altered.
An Individual Voluntary Arrangement (IVA) does not have the stigma that is usually attached to bankruptcy, and so the impact on your reputation is likely to be minimal. The IVA will not be advertised in the press, although the transaction will be recorded on your credit record, as well as on the IVA Register, which is held by the Department of Trade and Industry (DTI).
IVA Case Study
Because an IVA can usually take 3-6 months to set up, a Debt Management Plan will usually be proposed initially so as to rapidly put you back in control of your payments, and is intended to take the pressure off your financial situation until the IVA is approved and started.
Case Study 1
Mr and Mrs H were struggling to maintain their financial commitments. Their rent payment was £525 per month, their monthly household bills were £1,141 per month and the contractual payments for their £45,548 of unsecured credit totalled £1,011 per month. This represented total monthly commitments of £2,677.
They only had a joint net monthly income of £2,133 so it was therefore determined that the amount available to fund their credit commitments was £467 per month.
Proposed Solutions:
a) Debt Management Programme
As an IVA can usually take 3-6 months to set up, a debt management programme was initially proposed with a monthly payment of £467 resulting in a total saving of £544 per month. This immediately relieved the pressure and enabled Mr & Mrs H to maintain their rent payments.
b) Individual Voluntary Arrangement (IVA)
Following on from the Debt Management Programme, an IVA was then proposed, again with a monthly payment of £467 and a saving of £544 per month. During the 5 year term of the IVA Mr & Mrs H will have paid back £28,020, representing a 39.5% reduction in their total unsecured debt. Their creditors will then write off the remaining £17,528.
Case Study 2
Mr & Mrs S owed a total of £143,630 in unsecured borrowing with 19 different creditors. Their monthly contractual payments were now £2,419 a month. Mr S’s income had dropped due to a lack of overtime and a short period where he had been unable to work due to illness. This had led to multiple missed payments on many of their accounts and they were now finding it hard to maintain their ongoing monthly commitments.
Proposed Solutions:
a) Debt Management
Due to the complexity of the case because of the number of creditors, the time taken to set-up an IVA is likely to be 6-months or so. Accordingly, a Debt Management Programme would generally be proposed, with an affordable payment of £725 each month. This action would result in a reduction of £1,694 each month and the be much more manageable for Mr & Mrs S.
b) Individual Voluntary Arrangement (IVA)
Following on from the Debt Management programme, in this case, an IVA would be proposed with the same affordable monthly payment of £725 per month. At the end of the 5-year period, Mr & Mrs S will have paid back a total of £43,542, resulting in almost £100,000 being written off, representing an approximate 70% reduction in their total debt.
Is an Individual Voluntary Arrangement (IVA) appropriate for me?
If you cannot meet your current contractual repayments, and have at least £15,000 of unsecured credit, with at least three different creditors, and can afford to pay at least £200 per month, then it’s very likely that an IVA could well be an appropriate solution for you.
What are the advantages and disadvantages of an IVA?
Advantages
- You have the benefit of one lower regular monthly payment.
- Your will be able to maintain your mortgage (or rent) and utility payments.
- You will be debt-free after just 5 years.
- Up to 70% of your debts could be written off.
- All communication with your creditors is handled by an Insolvency Practitioner
- Interest and charges are frozen on unsecured debts
Disadvantages
- An IVA will have an adverse effect on your credit record
- An IVA is not available to everyone as certain criteria must be met
- Failure to maintain your payments under an IVA may result in your bankruptcy
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