Introduction

If you’re struggling to manage your debt, an Individual Voluntary Arrangement (IVA) might be a lifeline worth exploring. An IVA is a legally binding agreement between you and your creditors that can help you regain control over your finances by setting up affordable monthly payments.

While it’s not a one-size-fits-all solution, understanding how an IVA works—and when it’s appropriate—could save you from mounting pressure and give you a clearer path forward.

In this guide, we’ll break down the essentials of IVAs, explore when they’re suitable, and review alternative debt management options to help you make the best decision for your circumstances.

What is an Individual Voluntary Arrangement?

An Individual Voluntary Arrangement (IVA) is a formal agreement made between you and your creditors to repay a portion of your debts over a set period, usually five to six years. It is set up and managed by an insolvency practitioner, who will negotiate the terms with your creditors and distribute your monthly payments accordingly.

The IVA becomes legally binding once your creditors agree to the terms, offering you protection from further legal action or harassment. However, it’s essential to note that not all types of debt can be included in an IVA.

Examples of debts typically covered by an IVA:

• Unsecured loans
• Credit card debt
• Utility arrears

Debts not covered:

• Secured debts
• Student loans
• Child support payments
• Court fines

This structure ensures a predictable repayment plan while also giving you a chance to write off unaffordable debt at the end of the term, but there are strict requirements to qualify.

 

When Should You Consider an IVA?

Choosing an IVA is a serious decision, and it’s essential to assess whether it fits your financial situation. You might consider an IVA if you have:

• Significant Unsecured Debt: Typically, over £10,000 spread across multiple creditors, however it may be possible with debt levels as low as £5-7,000. Remember though that any benefits maybe wiped out by fees if the debt isn’t terribly high.
• Steady Income: A reliable income stream is necessary to commit to regular repayments.
• Multiple Creditors: You must owe money to at least two different creditors.
• Protection from Legal Action: If you’re overwhelmed by creditor threats, an IVA offers legal protection.
• You do not have significant assets: If you own assets of considerable value like property you may not be able to use an IVA.

However, there are risks. Missing payments could lead to the IVA’s failure, and your credit score will suffer for six years.

Key Benefits and Drawbacks

Remember, an IVA isn’t suitable for everyone. It’s crucial to weigh up your options carefully and seek financial advice.

Costs and Fees Associated with IVAs

IVAs come with costs that are often factored into your monthly payments, making it crucial to understand the financial implications. Here’s a breakdown:

1. Setup Fees: Also known as nominee fees, these cover the work your insolvency practitioner does to establish the IVA. The fee is generally spread over your monthly payments.
2. Ongoing Fees: Known as supervisor fees, these are charged for managing the IVA throughout its term.

In total, fees can run into thousands of pounds, but they are built into your monthly instalments rather than requiring upfront payment.

Pros and Cons of an IVA

Understanding the advantages and disadvantages of an IVA is crucial before committing. Here’s a clear summary:

Pros:

• Legal Protection: Creditors can’t take further action against you.
• Affordable Payments: Monthly instalments are tailored to your financial situation but are likely to be around £100 a month.
• Debt Write-Off: Any unpaid debt is written off at the end of the IVA term.
• Peace of Mind: No more harassment from creditors.

Cons:

• Impact on Credit Rating: Your credit score will be negatively affected for six years-even if, for example, your IVA only lasts five years.
• Home Equity Release: If you own a home, you may be required to release equity.
• Strict Budget: You’ll need to adhere to a strict financial plan.
• Risk of Failure: Missing payments could terminate the IVA, putting you back at square one.

Alternatives to an IVA

An IVA isn’t your only option for debt management. Here are some alternatives to consider:

1. Debt Management Plan (DMP): An informal agreement with your creditors to pay back your debts over time. It doesn’t offer legal protection but is more flexible.
2. Debt Relief Order (DRO): Suitable for those with low income and minimal assets. It freezes debt for a year and may write it off afterward. Read more here: Debt Relief Order (DRO): Is It the Right Option for You?
3. Debt Consolidation Loan: Combines multiple debts into one, possibly at a lower interest rate
   Not ideal if you have a poor credit score. Learn more – Debt Consolidation Loans
4. Bankruptcy: A much more drastic measure that can wipe out debts but comes with severe consequences, such as potential asset loss. You can find out more here: UK Bankruptcy: Myths, Facts and You

Comparison Table

Debt Solution	Key Features	Best For
IVA	Legally binding, protects assets	People with large debts and a stable income
DMP	Informal, no legal protection	People with smaller debts and variable income
DRO	Low-cost, freezes debts	Those with minimal assets and low income
Bankruptcy	Full debt relief, asset risk	Severe debt situations where other options fail

Credit Counselling is a useful service that may help you with debt management and explore your options. A qualified credit counsellor will assess your financial situation, provide tailored advice, and may negotiate with your creditors to reduce interest rates or arrange more manageable repayment plans.

The counselling sessions are usually free and can clarify whether solutions like a Debt Management Plan (DMP) or a Debt Relief Order (DRO) are right for you.

This professional guidance is especially helpful if you feel overwhelmed or unsure of where to start.

To find out more about Credit Counselling, see our special report Credit Counselling: How It Can Help You Manage Debt

 

How to Apply for an IVA

Applying for an IVA involves several key steps and requires professional assistance from a licensed insolvency practitioner. Here’s a simplified breakdown of the process:

1. Initial Consultation: Meet with a debt advisor to assess your financial situation and determine if an IVA is the best option.
2. Proposal Creation: Your insolvency practitioner will draft a proposal outlining your repayment plan.
3. Creditor Vote: Creditors will review the proposal and vote on whether to accept it. At least 75% (by debt value) must agree for the IVA to be approved.
4. Implementation: If accepted, the IVA becomes legally binding, and you start making monthly payments.

FAQs About IVAs

Here are some of the most common questions people have about Individual Voluntary Arrangements:

1. Can an IVA be cancelled?
Yes, but only under certain conditions. Cancelling usually means returning to square one, and creditors may resume pursuing you for the full debt amount.

2. What happens if I miss a payment?
If you miss a payment, your insolvency practitioner will try to negotiate with your creditors, but consistent missed payments could cause the IVA to fail.

3. Will an IVA affect my job?
Some professions, like those in finance or law, may have restrictions. Check with your employer if unsure.

4. Can I apply for credit during an IVA?
No, generally you cannot take on new credit over £500 without informing your insolvency practitioner.

5. What happens at the end of the IVA term?
Any remaining qualifying debt is written off, giving you a fresh financial start.

Conclusion

An Individual Voluntary Arrangement (IVA) can be a powerful debt management tool, offering structured repayment and legal protection from creditors.

However, it’s not a universal fix. The decision to enter into an IVA should be based on your unique financial situation, weighing the benefits against the potential drawbacks, such as the impact on your credit score and home equity considerations.

Before proceeding, consult a licensed insolvency practitioner or seek guidance from a debt charity to explore all available options. Taking the time to understand your choices will set you on a more secure financial path.

Some Useful External Resources:

1. StepChange Debt Charity (www.stepchange.org)
   Offers free debt advice and information on various debt solutions, including IVAs.
2. Citizens Advice (www.citizensadvice.org.uk)
   Provides free, independent advice on debt and consumer issues.
3. Money Advice Service (www.moneyadviceservice.org.uk)
   Offers free and impartial money advice, including information on dealing with debt.
4. National Debtline (www.nationaldebtline.org)
   A charity offering free debt advice and resources.
5. Insolvency Service (www.gov.uk/government/organisations/insolvency-service)
   Official government website with information on insolvency procedures, including IVAs.
6. Financial Conduct Authority (www.fca.org.uk)
   Regulator’s website with information on debt management and consumer protection.
7. Debt Advice Foundation (www.debtadvicefoundation.org)
   A charity providing free debt advice and educational resources.
8. Money Saving Expert (www.moneysavingexpert.com)
   Offers a wealth of financial advice, including information on debt solutions.
9. PayPlan (www.payplan.com)
   Provides free debt advice and debt management solutions, including IVAs.
10. Insolvency Practitioners Association (www.insolvency-practitioners.org.uk)
    Professional body for insolvency practitioners, with information on finding a licensed practitioner.