Have you heard that an Individual Voluntary Arrangement (IVA) can help people write off a lot of their debts?
That probably sounds great – and it’s not wrong… but it is only a small part of the story.
IVAs are complicated five or six year inflexible legal contracts. You need to know what might go wrong before you start one, not find out the hard way later.
What is an IVA?
IVAs are arrangements with your creditors to pay off unsecured debt such as loans, credit cards and overdrafts.
You can also include government debts such as tax debts and benefit overpayments. There is a full list in Insolvency and types of debt.
Secured debts (mortgages, secured loans, HP and car finance) cannot usually be included in an IVA.
An IVA is a type of insolvency, like bankruptcy, in England, Wales and Northern Ireland. It is a legally binding contract between you and your creditors.
In theory, the contract can say almost anything, but there is a standard format that is used in most cases. It works like this:
- you make a monthly payment to your IVA firm for five years (some creditors insist this is six);
- the IVA firm takes its fees (large! at least £3,500!) and divides the rest between your creditors;
- if you have a house with equity, you have to try to release equity in the last year to pay into your IVA;
- at the end of your IVA, all the remaining debts are written off.
All this is set out in your IVA proposal, which your creditors vote to accept. 75% of those voting have to approve your proposal.
Of you have one very big creditor, this effectively gives that creditor a veto on whether you can have an IVA.
If they agree, your IVA is then legally binding on all your creditors, not just those that voted for it.
What happens during an IVA
All interest is frozen during an IVA and you will not be hassled or taken to court by your creditors.
Every year there will be an IVA review when you have to supply your bank statements and payslips to be checked.
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 any money you inherit or any PPI refund you get.
If things get worse, you may be able to suspend payments for up to 9 months, or longer if your creditors agree. These missed months are then added on to your IVA term.
Sometimes it is possible to rescue a failing IVA but big problems, especially in the first few years, may well mean your IVA fails.
More than a quarter of IVAs fail – often people were too optimistic at the start that they could manage 5 or 6 years of these payments.
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 another year. If you have already had payment breaks, this may mean that your IVA is going on for 7 years.
You may think you won’t be able to remortgage. But you may 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 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.
IVAs don’t suit everyone – will one suit you?
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 your own 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 for the 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 in the house that need 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 £20 you can spend each month.
You need to know how you will cope with likely changes during the IVA period. Some examples:
- if your eldest child gets to 18 in year 3, what will your budget look like without Child Benefit and Child Tax Credit?
- how will you manage if you need a new car? or when your current car finance ends?
- if you are renting and have to move, is there anyone that can be a guarantor, as the IVA wrecks your credit rating?
- what if mortgage rates go up? petrol prices rocket?
These are the reasons 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 a long time and a lot of small changes can accumulate. If you have only £100 a month to be able to pay towards an IVA at the start, 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. If you have a lot of equity and unmanageable debt an IVA can work well.
IVAs are the best choice for the small number of 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 do look at your other options. With little or no equity, you may be able to keep the house 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.
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 or call National Debtline! This is a huge decision and you need to get it right.
If you have had unaffordable payday loans or other high cost credit, you may be able to get a refund if you complain. But you have to do this before your IVA starts – once you are in an IVA any refunds go to your creditors and don’t reduce your IVA payments.
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 likely to be 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.
I suggest you do this in two steps. First go to your local CAB or National Debtline to confirm that an IVA really is a good option for you.
Then do some research on firms. Read How to choose an IVA firm, that has some information on some firms with low IVA failure rates. Have a look at: 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 may be biased.
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 this is a formal legal contract. In particular:
- if you have a house you need to understand how the ‘release equity’ in year 5 will work. Ask for various examples based around your house value and mortgage to show when you would need to remortgage/get a secured loan and when you might need to make an additional year’s payments.
- ask the firm if it is their policy to make people take a secured loan;
- make sure you understand if there is any impact on your pension, see Is my Pension safe in an IVA?
- if you have car finance ending during the IVA, ask the firm what your options will be.
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 only one or two IPs so you only ever talk to call centre staff. My preference would be to choose a small or mid-sized 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. A good firm should want to answer all your questions and give you time to think about whether this is right for you.
Misleading IVA advertising
Firms will make thousands of pounds from setting up an IVA for you, so they can afford to cold-call/text/advertise. Some of them overemphasise the advantages and play down the disadvantages of an IVA.
They talk about contact from your creditors stopping and a low affordable monthly payment. They don’t tell you how many IVAs fail or explain that the affordable payment can’t always be decreased if you get into financial problems.
IVAs are only suitable for a small proportion of people with problem debts. An IVA may be your best option, but you need genuinely independent advice about this from people who will not make any money from your decision.