What is an IVA and How it Works

If you had debt going into 2020, the past year has likely been incredibly stressful for you. It has been estimated that 700,000 more have fallen into poverty in the UK. People have always experienced personal debt problems. Prior to the pandemic, approximately 8.3 million people were over-indebted in the UK, with an estimated 22% of adults in the UK having under 100 pounds in savings. Being in this type of situation makes a person vulnerable to unexpected economic shocks. If you had monthly debt payments and lost your job or had your income reduced due to Covid-19 cutbacks, you would likely have had to default on your debt.  There are options available to assist you in and prevent you from getting into these financial situations. One of them is an IVA.  Here is some information about IVA’s and how they work.

What Is An IVA?

IVA stands for Individual Voluntary Arrangement. If you have a lot of debt and multiple creditors, an individual voluntary arrangement is an option for you. The arrangement means that you agree to some of your income each month, or a lump sum, to your creditors. It is different from your normal debt circumstances because you only make one payment, which is then spread out amongst your creditors by an insolvency practitioner. This monthly payment is not simply the sum of all your usual monthly debt payments, it’s actually less because your creditors will write-off some of the debt that you owe them, meaning that you actually pay less. Your creditors obviously have to agree to these details so that it works out for them too. This is also not an option for everyone, there are certain requirements to qualify for an IVA.

For those interested in how much you can save from entering an IVA, you can make use of an online calculator at https://www.jubilee2000uk.org/iva-calculator. You may be surprised by how much of your debt can be alleviated, however, first check that you meet the requirements to qualify for an IVA before you get your hopes up.

Who Is An IVA For?

First, the sum of your debts needs to be more than £10,000. You may be able to get an IVA if they add up to less but there are usually better options available and the fees are also high. You then need to have more than one creditor, these must be different entities. It doesn’t count to have multiple debts with one entity or person. You then, and most importantly, need to have enough income to make the IVA payments.

An IVA is great for people with many creditors and who do not want to deal with them directly. A qualified insolvency practitioner will deal with the creditors, ensuring that they each get their agreed share of the IVA funds. The fees for the insolvency practitioner will be included in the IVA monthly payments or lump sum.

What Are The Risks And Costs of Getting  An IVA?

As mentioned earlier, the costs involved are for the qualified insolvency practitioner fees. These are high and depend on how much of your debt you have to repay as well as the overall size of your debt. IVAs can cost around £4,000 and £5,000, which are usually included in the monthly IVA payments. You may need to sell some of your valuable possessions, like cars, jewelry, and furniture to pay the IVA. For those who come into unexpected money, like an inheritance, this will have to go into the IVA. 

Your pension will also need to go into the IVA, so it’s important that you have enough money to get by after your IVA monthly payments. If you own a house, you may have to remortgage it to contribute. This is another thing that you should look into before entering into the agreement. You may need to consult with someone about this if you are holding your house as part of your pension plan. Houses can only be remortgaged if they have equity. Usually, when someone is unable to remortgage their house, they pay into the IVA for an extra year. In general, an IVA lasts for either 5 or 6 years.

Some professionals are excluded from entering into an IVA, such as accountants, lawyers, and financial service professionals. This can be a great way to pay off debt, but it is crucial that you make sure that it is the best decision for you.