Have you heard that an Individual Voluntary Arrangement (IVA) can help some people write off a lot of their debts?
That sounds great – and it’s not wrong… but it is only a small part of the story. IVAs are only suitable for a few people with problem debt.
Firms make thousands of pounds from setting up an IVA for you, so they can afford to advertise heavily on social media. These adverts often stress the advantages and don’t mention the disadvantages of an IVA.
You need to know about the problems that may occur before you sign up to one, not find out the hard way later. And also look to see if you have a better option than an IVA.
A quick overview of 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.
IVAs are arrangements with your creditors to pay off unsecured debt such as loans, credit cards and overdrafts. You can also include other debts such as utility arrears, tax debts and benefit overpayments. There is a full listof what can and can’t be included in Insolvency and types of debt.
It works like this:
- you make a monthly payment to your IVA firm for five years (some creditors insist this is six years);
- all interest is frozen during an IVA and you won’t be hassled or taken to court by your creditors.
- if your income goes up during the IVA you will have to pay more each month. This does not make your IVA end sooner;
- there is some limited flexibility to reduce payments if you get into difficulty. But many fail;
- 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.
What happens during an IVA
All IVAs should have an annual review where your pay slips and bank statements will be checked. If your income has gone up you may have to pay more and if your expenses have gone up this is your chance to ask to pay less. See What happens in an annual review.
If your circumstances improve during the IVA, you will have to pay extra into the IVA. Ooften 50% of a pay increase or the whole of any money you inherit or any refund you get.
If things get worse, you may be able to get payments reduced, suspend payments for up to 9 months, or longer if your creditors agree. These missed months are added on to the end of your IVA.
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 third of IVAs fail. Often people were too optimistic at the start that they could manage 5 or 6 years of these payments. Other IVAs have been derailed by inflation, having another baby or losing their job.
If you have equity in your house, you are likely to have to remortgage or take an expensive secured loan in the last year of your IVA, see below. If this is not possible, your payments are usually extended for another year.
Problems that happen with IVAs
What may change during the IVA
You need to know how you will cope with likely changes during the IVA period.
It can be hard to predict inflation. but many likely trouble spots should be obvious at the start of an IVA:
- a mortgage fix ending while your IVA is still running, can be a major problem and result in your IVA failing or being extended for more years;
- how will you manage if your car dies?
- if you have a car on finance, find out what will happen when your car finance ends
- if you have children, how will the costs rise as they get older? Will they need mobiles, pocket money, school trips?
- if a child gets to 18 during the IVA, what will your budget look like when your benefits decrease?
- might you need to move? An IVA wrecks your credit rating for 6 years, even if the IVA is settled early. This makes it very hard to get a new private tenancy – you will probably need a guarantor – or a new mortgage.
If your situation is likely to improve a lot, then an IVA is probably not a good idea either! You can end up repaying more than your original debts because of the IVA fees.
A tight IVA can turn into a disaster
It doesn’t take something dramatic like redundancy or a critical illness – 5 or 6 years is a long time and a lot of small changes can accumulate.
If you are paying £400-500 a month to the IVA, there is wriggle room to reduce your IVA payments if necessary. But if you only have £150 a month to be able to pay at the start, it isn’t going to take much to go wrong for your IVA to collapse.
The “secured loan clause”
Before your IVA is agreed, your IVA firm may just refer to “remortgaging” in the last year of your IVA. And you may feel pretty sure that no-one will offer you a remortgage!
But the IVA legal documentation almost always says you may have to take a secured loan if you cannot remortgage. In 2023 more people with IVAs are being forced to talk to a bad credit loan lender about releasing equity with a secured loan:
- the interest rates can be very high, 15%, 19% or more
- these loans are often very long.
These are horrific – no-one should have to take out this sort of loan at the end of an IVA that was meant to get you out of debt.
If you are already in an IVA and are being pressured to take one out, you can complain.
But if you are just thinking about an IVA, it’s best to avoid this nightmare.
You could tell your IVA firm that you want the secured loan clause deleted – this is possible but they won’t want to do it. Or you can talk to a different IVA firm – I don’t believe StepChange has ever suggested someone takes out one of these rip-off loans.
If you want to end the IVA early
This isn’t easy and it can cost you a lot more than you expect. You should not go into an IVA thinking that you will be able to do this.
Many people think that their IVA says they have to make 60 payments of £150 say. So they think after making 15 payments, they can settle the IVA by finding the money for the other 45 payments.
This is not how IVAs work.
In an IVA you are expected to pay as much as you can to your debts, not just the monthly amount agreed at the start. So you may need to clear your debts in full, plus the IVA firm’s high fees.
Here are some different cases:
- if a relative could offer money to settle the IVA, read How much should I offer to settle my IVA early?
- Sell house to end the IVA. Do not sell your house without getting this agreed with your IVA firm and approved by your creditors first.
- Take money out of pension to end the IVA. Same problem – you must not do this until your IVA firm and creditors have agreed first.
- Made redundant – some of your redundancy money has to go into your IVA and if it isn’t enough to clear all your debts in full, plus the IVA fees, your IVA won’t end early.
- You inherit money This sounds like good news but the inheritance goes to your creditors. Your IVA only ends if there is enough to repay all your debts in full plus the IVA fees.
Also even if your IVA is settled after a couple of years, it will still be on your credit record for 6 years, so problems getting a new tenancy or a mortgage will continue.
Do you have a better option than an IVA?
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 – Citizens Advice or National Debtline.
Don’t dismiss other options – compare them
Look at the choice between an IVA or DRO
If you are renting and owe less than £30,000 in total, you must look into this. If you qualify for a Debt Relief Order that is always a better solution than an IVA! Don’t be one of the thousands of people every year who are mis-sold an IVA which fails because you should have had a DRO.
Look at the choice between an IVA or bankruptcy
Don’t be scared of the word bankruptcy and assume an IVA must be better. Often bankruptcy is a MUCH better choice unless you have assets to protect:
- 7 out of 8 people don’t have to make any monthly payments in bankruptcy.
- IVAs and bankruptcy are exactly the same for your credit rating and your chance of getting a mortgage afterwards.
- bankruptcy never goes wrong – 30% of IVAs fail, leaving you back with your debts.
Look at the choice between an IVA or a DMP
If your situation may change – for better or worse – a flexible DMP is often better than an inflexible IVA. A DMP may sound long at the start but it can be speeded up, eg with partial settlements or refunds for unaffordable lending?
Self-employed or own a small company?
An IVA can work if your business is profitable but you need advice from an expert, talk to Business Debtline about this.
“But an IVA will let me keep my house”
If you have a lot of equity and unmanageable debt an IVA can work well.
But with little or no equity, you may be able to keep the house if you go bankrupt. 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.
If you have a mortgage fix ending in the term of an IVA be very careful as the increased mortgage payments may be unaffordable. And with Help To Buy, think about what will happen when you have to start making payments on the government share – if this is in the term of your IVA it may make the IVA hard to afford.
Also think very hard about the implications of being made to take an expensive secured loan in the final year of your IVA (see above.)
“But an IVA won’t cause problems with my job”
IVAs are the best choice for the small number of people such as solicitors and MPs who cannot go bankrupt. But many people worry unnecessarily about whether their job would be affected.
How an IVA is set up
Choosing an IVA firm
An IVA has to be arranged by an IVA firm – there is no “DIY” option. Read How to choose an IVA firm.
A good IVA firm will help you understand all the terms in your IVA – keep asking questions until you are sure you know exactly what you are committing yourself to. And get the answers to these points in writing from the IVA firm.
If you don’t feel your IVA firm is being helpful or is pressuring you to take a decision, talk to another one!
A good firm should want to answer all your questions and give you time to think about whether this is right for you. Any firm that is trying to get you to make a decision fast is more interested in their own fees than the best option for you.
Creditors vote to approve the IVA
The terms of your IVA are set out in a formal legal document, which your creditors vote to accept:
- 75% of those voting have to approve your proposal;
- if 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 who voted for it;
- sometimes a creditor may require a change to the proposal. Don’t be pushed into agreeing to this, take some time to think about it. In particular, an extension to 6 years – consider if a more flexible DMP would be better.
Pros interest frozen, no hassle from creditors, debts wiped out after 5 or 6 years (may be extended), good for high-earning professionals with jobs where bankruptcy is not possible
Cons not much flexibility – one third of IVAs fail and leave you back with your debts, as much of your IVA payments will have gone to the IVA fees.
If your mortgage or rent may go up this may be a big problem.
Moving house or car finance ending can be big problem.
If you expect your income to fall or increase a lot, look at a debt management plan not an IVA.
Debt Camel says IVAs are most suitable for people owing a lot of money (£15k+) with assets to protect, and 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. You probably have a better option – IVAs are often mis-sold so it is right to be suspicious.