What is individual voluntary arrangement advantages and disadvantages?

IVA stands for Individual Voluntary Arrangement.

The history of IVAs

IVAs were introduced by the UK government in the 1980s under the 1986 Insolvency Act as an alternative to bankruptcy. An IVA is a legally binding agreement you can make with your creditors to pay off all or part of your debts. The idea behind IVAs is to help people with serious debt issues protect their assets, which, if made bankrupt, they risk losing. You might think this sounds like a great alternative, but as with everything, there are ‘ifs’ and ‘buts’ to seriously consider. The biggest ‘but’ is that if you cannot make the agreed payments towards your IVA, the creditors can make you bankrupt, which means you are no better off financially than when you entered the IVA. Let’s find out more about how an IVA works.

How does an IVA write off debt?

An Insolvency Practitioner sets up the Individual Voluntary Arrangement. As part of the agreement, you will be asked to provide full details of your financial situation, including any assets, income, and all creditors to whom you owe money. The IVA involves an agreed monthly payment that the Insolvency Practitioner is responsible for distributing among the creditors on the list. If 75% or more of your debt is owed to one creditor, they must agree to the IVA for it to be approved.

After approximately 5 to 6 years, the remaining debt is written off.

Payment breaks and hidden costs

As you’ve probably guessed, this isn’t a free service, with most Insolvency Practitioners charging an initial setup cost and a monthly fee for ongoing management of the monthly payments to your creditors. It’s crucial to research all the costs; you don’t want to enter into an arrangement like this if the additional costs will make your financial situation even more challenging to handle.

When you set up an IVA, there are still some restrictions you need to be aware of that could significantly impact your life. It’s essential to consider these aspects before deciding to make an application; the guy we mentioned earlier just hadn’t considered them at all.

To start with, an Individual Voluntary Arrangement typically lasts 5-6 years and comes with various restrictions that can make it more challenging to regain financial stability. For example:

• Borrowing restrictions: In most cases, you won’t be able to borrow or obtain credit for more than £500 without first obtaining permission from the insolvency practitioner. There are some exceptions, but these are generally limited to public utilities.

• Debts excluded: Some debts can’t be included in an IVA- see the section below for details.

• Public record: You’ll be added to the publicly accessible Individual Insolvency Register (IIR) for the duration of the agreement, and you’ll only be removed three months after the IVA has ended.

Debts not covered by an IVA

It’s also important to note that not all debts can be covered under an IVA. The following debts are treated differently and must be paid separately:

• Mortgages
• Secured debts (e.g., car loans)
• Student loans
• Court fines
• Child maintenance/support arrears
• TV licence arrears

These won’t be included in your IVA, so you’ll need to keep paying them as usual.

Common reasons for missed IVA payments

Life can be unpredictable. Your work hours might be reduced, an unforeseen bill could arise, or your car might have broken down. While IVAs have strict rules, your Insolvency Practitioner isn't there to penalise you. If you anticipate missing a payment, contact them immediately; they should suggest lower payments or a temporary payment pause with your creditors.

Consequences of failing your IVA

If payments stop and no solution is agreed:

• Creditors can demand bankruptcy.
• You’ll owe the original debt minus any payments made.
• Your IVA will be marked as “failed” on credit reports for 6 years.
• Fees paid may be lost (varies by provider).

These consequences can be quite severe, making it essential to consider your decision carefully before choosing the IVA route.

How to recover if your IVA fails

Don’t panic. Options include:

• Negotiating a new repayment plan directly with creditors.
• Switching to a Debt Management Plan (DMP).

The key? Act quickly and be transparent with the Insolvency Practitioner.

The 6-year credit impact

Your IVA will remain on your credit file for six years from the date it’s approved, regardless of whether you finish paying it off sooner. Here’s what that means for you:

• Obtaining credit will be tough: Lenders view an IVA as a significant red flag. Loans, credit cards, and even phone contracts can be hard to get, or you’ll be stuck with sky-high interest rates.
• Mortgages? Not easy: Most high street banks will say no while your IVA’s showing. If you are approved, expect a larger deposit and higher interest rates.
• Car finance: You might get it, but it’ll usually be with a “bad credit” lender and cost you more.
• Renting: Landlords and letting agents often check your credit. An IVA can mean you’ll need a guarantor, a bigger deposit, or you might have to pay several months’ rent upfront.
• Insurance and bills: Some insurers and utility companies may require upfront payments or increase your premiums.

• Am I at risk of losing my home or other major assets?
• Are my debts unsecured or secured?
• Have I explored all alternatives, like the Token Payment Method?
• Am I getting advice from someone who isn’t financially benefiting from my decision?

The Real Debt Guy is a qualified financial adviser and a UK debt expert. The information in this article is considered to be true and correct at the publication date.