If you have too much debt you may have heard that an IVA can help you write off a lot of it. That probably sounds great – and it’s sometimes true!
But it is only a small part of the story. IVAs are complicated and inflexible so you need to know a lot about them before you start one, not find out the problems later on.
Misleading IVA advertising
If you have been contacted or seen adverts about “a government loophole to wipe out most of your debts” that is an Individual Voluntary Arrangement (IVA).
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.
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.
What is an IVA?
IVAs are arrangements with your creditors to pay off unsecured debt – look at Insolvency and types of debt for details on which debts can be included. Secured debts (mortgages, secured loans, HP and car finance) cannot 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 one common form used in 95% of 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 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 debt 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. If they agree, your IVA is then legally binding on all your creditors, not just those that voted for it.
What actually 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. 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 months are then added on to your IVA term – some IVAs have not completed after 8 years!
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 since 2014, 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 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.
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 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 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?
- 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?
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 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 and IVA can work well. 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 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; 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 at all.
Summary
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. they will refer you to an IVA firm.
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 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 upfront unless it is clear that you will get them back if your IVA proposal is not accepted by your creditors!
IVAs as bad for credit records as bankruptcy
Choosing between an IVA and a DMP
Debt Camel’s detailed Guide to IVAs
vikki williams says
hi I was looking for some advice. I am struggling to pay my debts since going part time. I have £18k worth of credit card debut & pay £340 per month. I was looking into an IVA but I am concerned about my house as I am a single parent. I have very little equity, will I lose my home or be forced to remortgage at the end of an IVA?
any help much appreciated?
Sara (Debt Camel) says
If you have little equity in the last year of your IVA you should not need to remortage or take a secured loan. But if house prices go up so your equity increases, you may have to, or have a 6th year of IVA payments.
Why have you gone part time? Are there like to be any more changes in your income or expenses over the next 5 years? If there are, it’s possible your IVA could fail…
Have you looked at reclaiming any PPI from any debts? In an IVA all this money goes to your creditors and doesn’t reduce your payments… the PPI refunds can be so large that you wouldn’t have needed an IVA at all if you had done this at the start.
When you are in an IVA you will find it very difficult, probably impossible, to remortgage. If you are on a fixed rate at the moment, you need to think how you will manage when that ends – what is your current lender’s standard variable rate as that is what you will switch to? And how will you manage if there are more interest rate increases? A quarter of IVAs fail and you are left with your debts and then the IVA fees.
I suggest talking to some like National Debtline 0808 808 4000 to see if an IVA is a good option for you, taking into account your situation and what may happen in the next 5 years.
vikki williams says
thank you!
I was forced to part time, under a job share. that or lose my job.
Would I be given the option of remortgage or a 6th year of paying?
My circumstances are not likely to change over the next 5 years.
I will look at PPI but back then when this was all going on, I was only quite young & still living with parents & didn’t have loans etc.
I am on 5 yr fixed rate, due to expire Dec 2021. I will look into what happens at the end of this term.
I thought the IVA assess your income/expenditure & an affordable repayment plan of what I can afford to pay per month was agreed & passed to my creditors? Is this not the case & will I still pay out what I am paying now?
Sara (Debt Camel) says
could you not find another full time job? Don’t start an IVA because you have a temporary income problem, it is a form of insolvency like bankruptcy, if nothing else will work for you it could be good, but look at your other life choices first.
“Would I be given the option of remortgage or a 6th year of paying?” No, you only have to pay a 6th year if you can’t remortgage. the problem here is that for new IVAs there is a “secured loan” clause which means you may have to take out an expensive secured loan – this is new so not much is known about how it will work in practice. Here was one reader’s story: https://debtcamel.co.uk/2014-change-to-iva-protocol/. NB this won’t be a problem if you don’t have any equity at the end of your IVA.
“I am on 5 yr fixed rate, due to expire Dec 2021. I will look into what happens at the end of this term.” You will move onto whatever your lender’s Standard Variable Rate is at that point. You should find out what that is now, but of course it could go up 1 or 2 % in the next few years.
“I thought the IVA assess your income/expenditure & an affordable repayment plan of what I can afford to pay per month was agreed & passed to my creditors? Is this not the case & will I still pay out what I am paying now?” No, that is what will happen. But the problems arise when something in your life means that you can’t meet those payments. Your car dies, your mortgage goes up a lot, other bills rise more than your income etc. Your IVA payments can only be decreased by 15% easily, more than that and your creditors have to agree to the change.
This must sound as though I am trying to put you off – I’m not, I am just trying to make sure that you know what you are committing yourself to.
JOE says
Hi
I am waiting for an IVA to be setup I am told the amount to pay would be £6100
I have just been told I could possibly get a contract which increases my money
Will this money be taken and deducted from my repayment or is there an option where it can be put aside and paid in a lump sum?
If I get the contract and the £6100 could be paid off in 6 months would I get any issues?
Any advice would be appreciated
Sara (Debt Camel) says
You have badly misunderstood what an IVA is. If you are about to get a large payrise, you may wish to urgently reconsider if you should decide not to start one.
If you get more money when you are in an IVA you have to pay more into your IVA. The £6100 is what you would have to pay if you get what you are paid now, it is not a fixed sum. Being paid more does not enable you to end the IVA sooner, or to save up a lump sum to make a settlement offer, it just means your creditors get more.
Also have you looked at PPI reclaims? In an IVA your IVA company will make these, the money all goes to your credits (less the IVA and claims firm fees). this too doesn’t mean your IVA ends early.
So if you are getting a lot more money its best to stop and think now to and see if you can manage without an IVA and avoid having the insolvency market on your credit record for 6 years.
Hayley Gooding says
Hi there, my partner and I are trying to set up an IVA with a debt support agency (we have had a great reduction in income of recent times and have not been able to pay some of our debts off for quite some time) just tried to get a statement from Barclaycard for my partners card and it seems as though they’ve sold the debt on to a debt collection agency however as the card was registered in our old address we’ve got no way of knowing where the debt has been sold onto? Also, vanquis and a hitachi loan were sold on as well as been paid off on credit file but not had any contact from debt collection agency for vanquis and the debt collector that supposedly took over the hitachi finance debt is still writing to us but it looks like that has been settled on his credit file as well so could have been sold on to another company but we don’t know where? Don’t want to be bombarded with letters by calling as my partner recently had a mental breakdown and I think the letters would add undue stress and we want to get this IVA set up but cannot without knowing where the debts have been sold on to. Help!
Sara (Debt Camel) says
Which debt support agency are you talking to, because they should be helping you with this!
Yes, you do need to know who owns your debt for an IVA and how large it is. A debt that looks as though it is settled has probably been sold on. You can phone up to get the details of who it was sold to, but if you don’t want to do that, you could ask barclaycard and the debt collectors for the information by writing a letter to them. There isn’t a way of doing this “in secret”, but it is unlikely to result you being bombarded with letters or calls.
A couple of other points:
– you may be going to get some good news about the old Vanquis debt if you ever paid for the ROP product on it (this was a bit like PPI). If you did, a lot of interest may be refunded to you sometime in the next few months. If you have started the IVA, this refund just goes into the IVA and you never see it.
– is there any PPI you could reclaim? Again if you have started an IVA you never get this money. A lot of people say they would never have needed the IVA if they had known how much PPI they could get back!
– I’m sorry to hear about your partner’s mental health problems – are they still in work or on benefits? Do you have a mortgage you are struggling to repay?
Steve says
Hi
So I have spent the last 8 weeks discussing with Creditfix to get an IVA across the line and set up.. creditors declining and 3 creditors meetings, then Creditfix say they need to redo the proposal due to their changes in fees, I never received this, I incurred a change of circumstance and they say they would need to go through the income and expenditure again… this was two weeks ago and no more communications..
Am i allowed to explore other IVA or other debt solutions away from CreditFix?
Sara (Debt Camel) says
I have heard of other people having their IVAs proposed by Creditfix being declined at the moment so this isn’t something unusual about your case.
If you are having second thoughts about whether an IVA is right for you, you should tell Creditfix immediately that you do not want them to proceed at the moment as your circumstances have changed and you want to rethink if an IVA is right for you. Tell them on the phone but also put this in writing by email and keep a copy of that email. Be very clear that you do not want them to proceed.
IVAs are big, serious, long term commitments. You need to be convinced that you don’t have any better options not just at the moment but that your circumstances aren’t going to change significantly over the next few years – either for the better or the worse!
Can you say something about your current situation?
Lexi says
I have over 15000 on credit cards its all my fault as I still live with my parents and only pay 200 rent. I stopped spending last summer but it isnt going down much because of the interest and I cant get 0% cards with my credit record.
A friend suggested an IVA but can I get one as I can make the payments? I am hoping to move in with new partner in the summer and want this sorted before then so it isnt his problem. I would have to pay more rent and bills but time to start being an adult and less petrol costs as hes next to my work.
Sara (Debt Camel) says
You may be able to get an IVA now, it will depend if you have enough to pay the debts each month after allowing for a reasonable level of expenses. But if you do have enough left than your creditors are not likely to agree to an IVA.
But in your case you absolutely shouldn’t try to get an IVA now! You have potentially a very big change in your finances coming up, moving in with a partner, increased bills but possibly lower commuting costs. It is much better to wait and see what your situation is like at that point. You may have a lot less money available each month – although IVAs can sometimes be changed, this isn’t guaranteed. More than a quarter of IVAs fail when people can’t manage what they originally thought was an “affordable” payment.
I don’t know if your boyfriend knows about your debts – it’s also not practical to keep quiet about being in an IVA.