An IVA is a legally binding arrangement between you and your creditors. In theory this can take almost any form, but there is one common form used and that is what is discussed here. (One variation – a single payment IVA – is mentioned below.)
If you have been contacted or seen adverts about “a government loophole to wipe out most of your debts” that is an IVA. You are being cold-called because firms are hoping to make literally thousands of pounds from setting up an IVA for you. Some of them over emphasise the advantages and play down the disadvantages of an IVA.
IVAs are only suitable for a small proportion of people with problem debts. You may be one of the few, but you need genuinely independent advice from people who will not make any money from your decision to tell if you are.
How does an IVA work?
IVAs are arrangements to pay off unsecured, consumer debt – look at Insolvency and types of debt for details on which debts can be included. Secured debts (mortgages, secured loans and HP) cannot be included.
You make a monthly payment to your IVA for 5 years. If you have a house, you will have to try to release equity in the last year of your IVA.
All this is set out in your IVA proposal, which your creditors vote on. 75% of those voting have to approve your proposal. If they agree, your IVA is then legally binding on all your creditors, not just those that voted for it: interest is frozen, you will not be hassled by your creditors.
During an IVA
If your circumstances improve during the IVA you will have to pay extra into the IVA – often 50% of a pay increase or the whole of a legacy that you receive.
If things get worse, you may be able to suspend payments for a while – there are details about the possible ways of rescuing a failing IVA are in this article but big problems, especially in the first few years of an IVA may well mean your IVA fails.
If you have equity in your house, you are likely to have to remortgage, towards the end of your IVA – if this is not possible, your payments are usually extended for a sixth year.
In 2014 a change was made to the IVA Protocol (the terms used for many simple IVAs) that means you might have to take a secured loan if you cannot remortgage. If you have a house and are thinking about an IVA you need to understand the possible implications of this. It’s not clear how common this will be but two readers have commented saying that they are being pressured to take out secured loans for 15 years at 16% interest and 7 years at 22% interest. These are horrific – no-one should have to take out this sort of sub-prime, rip-off loan after making 5 years of IVA payments.
When your IVA completes your debts are wiped out and you get your IVA completion certificate – some people are having prolonged delays at the moment getting this certificate, see this article.
IVA minimum requirements
You have to:
- owe a minimum amount of unsecured debt to at least two creditors
- have a minimum amount of ‘surplus income’ that you can pay each month towards your IVA
- not have assets that are worth more than your debts.
These minimums are not defined in law – different IVA firms quote different minimum amounts.
Some firms quote as little as £8,000 in debt and £100 a month available income. This isn’t a good idea – with a budget that tight you do not have enough wriggle room to know you can get through a 5 or 6 year IVA. IVAs are not flexible arrangements, despite what some firms say. If something goes wrong it may be possible extend the IVA or renegotiate the terms, but frequently it isn’t, so your IVA will fail and you are back to square one with all your debts plus the IVA fees added on top.
What else is needed for an IVA?
You need a stable and secure income. If you are on a zero hours contract or dependent on erratic overtime an IVA is problematic and you need to discuss in detail with the IVA firm how your monthly payments may change. If you have a profitable self employed business, you need to talk to a specialist IVA firm (not the one that cold called you!) as a self-employed IVA can be more flexible and cope better with variable income, see IVAs if you are self employed for details.
You need a budget that will be workable for the 5 year period. That means sensible amounts for clothes, at least something for entertainment and providing for things that wear out to be replaced. The budget needs to include an amount for an emergency fund – at some time over the 5 year period you are going to need it, so this isn’t just an extra £25 you can spend each month.
You need to know how you will cope with predictable or likely changes during the IVA period. If your eldest child gets to 18 in year 3, what will your budget look like without Child Benefit and Child Tax Credit? If your car is old, how will you manage if it dies? If your car lease ends in two years requiring a final lump sum payment, how will you afford that? If your tenancy ends and you have to move, how will you manage the moving costs? What if mortgage rates go up? What if petrol prices rocket?
This is the reason that a tight IVA can too easily turn into a disaster. It doesn’t take something dramatic like redundancy or a critical illness – a 5 year period is long while and a lot of small changes can accumulate. If you have only £100 a month to be able to pay towards an IVA, then it isn’t going to take much to go wrong for your IVA to collapse.
Some of the saddest cases debt advisors see are people whose IVA has failed – and very often these people should never have signed up to an IVA in the first place:
- there is a page here that looks at deciding between an IVA or bankruptcy;
- if you are renting, you owe less than £20,000 and you have little spare money each month then your best option is a Debt Relief Order, not an IVA.
But an IVA will let me keep my house and not cause problems with my job!
True. They are the first choice for people such as solicitors and MPs who cannot go bankrupt. If you have complex assets such as shares in a family firm or you are a member of a partnership then an IVA may let you protect those.
But if you have little or no equity, you may be able to keep your house even if you go bankrupt. Many people worry unnecessarily about whether their job would be affected. And if the main cause of your financial problems is the mortgage and the secured loans that you have, then it may be better not to struggle to keep the house.
So you need to do your homework and look at all your other options. Think very hard about the implications of being made to take an expensive secured loan in the final year of your IVA (see above.) Get someone independent to have a look at your situation: think about posting anonymously on a bulletin board; go to your local CAB; call National Debtline – or do all three! This is a huge decision and you need to get it right.
If you haven’t yet tried to reclaim PPI, do this before setting up an IVA. Once an IVA is set up, any PPI will go into the IVA, not to you. Some people get surprisingly large PPI payouts – large enough for them to settle many debts and reduce others to an affordable level so an IVA is not needed.
Pros interest frozen, no hassle from creditors, debts wiped out after 5 years, good for high earning professionals with jobs where bankruptcy is not possible
Cons not flexible – if things go wrong the IVA is likely to fail. You probably have a better option. Often mis-sold so be suspicious.
Debt Camel says IVAs are most suitable for people owing 20k+ with assets to protect, who have a regular and secure income. If you can’t tick all of those boxes, then there are almost certainly better options for you. Even if you can tick them all, still go and investigate the other choices.
Single payment IVA
If you have a lump sum to pay towards your debts but afterwards you are unlikely to be able to pay much at all on a monthly basis, then this could be a good option for you. A typical situation might be if you have been made redundant and you are unlikely to be able to work again, perhaps because of your age or health. It gives you a Full & Final settlement on all your debts without having to negotiate with each creditor individually.
How to set up an IVA
An IVA has to be arranged by an IVA firm that employs an Insolvency Practitioner (IP) – there is no “DIY” option. If you go to your local CAB or National Debtline they will refer you to an IVA firm, but Debt Camel suggests that you should talk to a few firms.
Once you have taken the decision that you want an IVA, the following website may be useful for researching possible firms: www.iva.co.uk. The people posting there tend to either work for IVA firms or be people who have IVAs already, so their comments are informed but possibly not unbiased.
A good firm will make sure that you understand all the details of your IVA proposal. The small print may not seem that important to you now if you are keen to get the IVA going, but you need to know exactly what you are committing yourself to for 5 years – this is a legal contract you are signing. In particular:
- if you have a house you need to understand how the ‘release equity’ in year 5 will work, this can be complicated especially if your house is jointly owned with someone who is not in an IVA. Ask for various examples based around your house value and mortgage to show when you would need to remortgage or get a secured loan and when you might need to make an additional year’s payments
- make sure you understand whether there will be any impact on your pension, see Is my Pension safe in an IVA?
You also need to feel that they are on your side so you won’t be scared to contact them if problems arise later. Some large firms operate IVAs like a factory process with very few IPs so you only ever talk to call centre staff – my preference would be to choose a firm where I knew I could speak directly to the IP if there was a problem.
Walk away from any firm that you feel is pressuring you to take a decision and never pay any fees up front unless it is clear that you will get them back if your IVA proposal is not accepted by your creditors!