An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement in England, Wales, and Northern Ireland between an individual facing financial difficulty (the debtor) and their creditors to repay all or part of their debts. As a key component of Personal Finance and Debt Management, an IVA offers an alternative to bankruptcy, structured to allow the debtor to make affordable payments over a set period, typically five to six years. The arrangement is facilitated by a qualified insolvency practitioner, who proposes a repayment plan to the creditors. Once approved by a specific majority of creditors, the IVA becomes binding on all unsecured creditors included in the arrangement, even those who voted against it. This provides the debtor with protection from further legal action and interest charges from those creditors.
History and Origin
Individual Voluntary Arrangements were introduced in the United Kingdom through the Insolvency Act 1986. Initially, the legislation primarily aimed to provide an alternative to bankruptcy for individuals with businesses, allowing them to continue trading while addressing their financial obligations. The idea was to offer a more flexible and potentially higher return for creditors than traditional bankruptcy proceedings, which often resulted in the liquidation of assets at low values and the cessation of a business.5 In its early years, the IVA was not widely adopted by consumers, with only 404 IVAs entered in 1987.4 However, as consumer debt levels rose significantly from the late 1990s and into the 2000s, the IVA transformed into a widely used tool for consumer debt relief. The introduction of the IVA Protocol in 2008 further standardized the process, making it more accessible for individuals with lower debt levels and smaller monthly contributions.3
Key Takeaways
- An Individual Voluntary Arrangement (IVA) is a formal, legally binding agreement between a debtor and their creditors to repay debts.
- It is an alternative to bankruptcy, offering a structured plan to manage unsecured debts.
- An IVA proposal must be approved by creditors holding at least 75% of the debt value.
- During an IVA, interest and charges on included debts are frozen, and creditors cannot take further legal action.
- IVAs typically last for five to six years, after which any remaining unsecured debts included in the arrangement are written off.
Interpreting the IVA
An IVA is interpreted as a formal insolvency solution designed for individuals who are Insolvency but have a regular income and sufficient disposable funds to make consistent contributions towards their debts. The success of an IVA hinges on the debtor's commitment to the agreed-upon Repayment Plan and transparent communication with their insolvency practitioner. For creditors, an IVA is often seen as a better outcome than bankruptcy, as it typically offers a higher rate of return on the money owed. The arrangement reflects a negotiated compromise, where the debtor gains protection and debt relief, while creditors receive a structured, albeit partial, repayment.
Hypothetical Example
Consider Sarah, who has accumulated £35,000 in unsecured debts from credit cards and personal loans. She earns a stable salary but struggles to meet the minimum monthly payments across all her creditors, leading to increasing stress and a deteriorating Credit Score. After seeking advice, she consults an insolvency practitioner.
Her practitioner helps her create a detailed budget, identifying £250 per month as her disposable income after essential living expenses. The practitioner then proposes an IVA to her creditors, suggesting she pay £250 per month for 60 months, totaling £15,000. This proposal also includes a clause that any remaining unsecured debt after the 60 payments will be written off.
At the creditors' meeting, her creditors, collectively representing over 75% of her total debt by value, vote to approve the IVA, recognizing that a structured repayment, even partial, is preferable to the uncertainty and lower returns often associated with Bankruptcy. Once approved, Sarah's monthly payments are consolidated into a single payment to her insolvency practitioner, who then distributes the funds to her creditors. Interest and charges on her debts are frozen, and the harassing calls from her creditors stop, allowing her to focus on rebuilding her finances through careful Budgeting.
Practical Applications
Individual Voluntary Arrangements find practical application primarily in personal financial distress scenarios within the UK. They are utilized by individuals who are struggling with unmanageable levels of unsecured Debt, such as credit card balances, personal loans, and store card debts. An IVA can provide a pathway to financial recovery by consolidating multiple debts into a single, affordable monthly payment. It's often considered by those who wish to avoid the full implications of bankruptcy, particularly if they own assets they wish to protect, such as their home or business. The process involves a formal agreement with Creditors and requires the services of a licensed insolvency practitioner, who oversees the arrangement from proposal to completion. The UK government's official guidance on debt options, including IVAs, highlights their role in enabling individuals to manage their financial obligations formally.
##2 Limitations and Criticisms
Despite their benefits, IVAs have limitations and criticisms. One significant drawback is their impact on the debtor's credit rating, which remains affected for six years from the date the IVA is approved. This can make obtaining new Credit difficult during this period. Furthermore, while an IVA offers a structured path to Debt Restructuring, it is a formal insolvency procedure, and failure to adhere to the terms of the agreement can lead to its failure, potentially resulting in bankruptcy. Debtors may also be required to release equity from their homes during the IVA term, depending on the terms agreed with creditors, which can impact their Asset Protection goals. The fees charged by insolvency practitioners can be substantial, although these are typically incorporated into the monthly payments and must be approved by creditors. Critics also point to instances where the IVA process can be complex, and debtors might not fully understand all the implications, particularly if they face pressure from debt solution providers.
##1 IVA vs. Bankruptcy
Both an Individual Voluntary Arrangement (IVA) and Bankruptcy are formal insolvency procedures designed to help individuals deal with overwhelming debt, but they differ significantly in their nature and consequences. An IVA is a structured agreement made with creditors, allowing a debtor to repay a portion of their debts over a period, typically five to six years, while protecting assets like a home or business from immediate sale. The debtor retains more control over their financial affairs and assets under an IVA. In contrast, bankruptcy is a court order that effectively clears most unsecured debts, but it often involves the sale of significant assets to pay creditors. While bankruptcy usually concludes within 12 months, its impact on a debtor's financial reputation can be more severe, and it may lead to stricter limitations on future financial activities and professional roles. An IVA requires creditor approval (75% by value), whereas bankruptcy is an order issued by the court.
FAQs
What types of debt can be included in an IVA?
An IVA typically includes most unsecured debts, such as credit card debts, personal loans, overdrafts, and store cards. It generally does not cover secured debts like mortgages or car finance, student loans, court fines, or child maintenance arrears.
How long does an IVA last?
Most Individual Voluntary Arrangements are set for a period of five years, although some can be extended to six years, particularly if there's a property with equity that cannot be released. In some cases, a lump sum IVA can be agreed upon for a shorter duration.
Does an IVA affect my credit rating?
Yes, entering an IVA will significantly impact your Credit Score and will remain on your credit file for six years from the date of approval. This can make it difficult to obtain new credit during and immediately after the IVA period.
Can my creditors contact me once an IVA is in place?
Once an IVA is formally approved, creditors included in the arrangement are legally bound by its terms. This means they cannot pursue you for the debts, take legal action, or contact you directly for payment. All communication regarding the debts goes through your insolvency practitioner.
Is an IVA suitable for everyone?
No, an IVA is not suitable for everyone facing debt problems. Eligibility depends on factors such as the amount of debt, the ability to make regular payments, and residency. It is crucial to seek independent Financial Planning and debt advice to determine if an IVA is the most appropriate solution for your specific circumstances.