IVA stands for Individual Voluntary Agreement and is a way to deal with creditors by managing repayments on your unsecured debts. There are two main types of IVA, long term and lump sum. Both options have a negative effect on your credit rating, and you must seek independent advice before making a decision.
This is where you repay your creditors in one lump sum. This can be taken from savings, redundancy payments or come from family or friends. Most obviously, in order to repay debts in one lump sum, you must have a lump sum of money to use. Through the legally binding agreement, you use this money to repay the debts in full in one final statement.
An IVA stays on your credit file for six years after the date it began. Your credit rating is negatively affected, with details of your IVA appearing on the IVA register (part of the Insolvency Register).
Before deciding on whether an IVA is the best option for you, you must seek financial advice. Places such as StepChange, can help you through this process.
You must have a regular income in order to apply for the IVA.
Once you have applied for an IVA, your Insolvency Partner will apply to court for an order to stop creditors taking action against you to recover the debt. You will need to complete an assessment which will assess what you can afford to repay.
Your IP will then look at your assets. Things such as your home or car could be used to repay your debts, but many IVAs will include clauses protecting your home. Whilst your home is not at risk, it could be used to release equity through a remortgage. If you use your vehicle for work purposes, this will also be noted and could be protected.
The Insolvency Partner will then draw up a proposal detailing your assets and your debts and then propose to creditors how much you can repay and over what time period. They will also try to convince creditors why this agreement will best suit them.
In order to get an IVA, 75% of your creditors must agree to the proposal of how much you’re going to repay and over what time frame. From then on, how much you repay is reviewed every year and is dependent on how much you earn. It can be flexible, payments increasing or decreasing, however all your creditors must agree to any changes, otherwise the IVA will fail.
Once your creditors have agreed to the terms of the IVA, the interest charges on your debts are frozen at 0%. This means that creditors can’t ask for any more money than you currently owe.
Your monthly payments are paid to your Insolvency Partner, who then pays your creditors. Once your final payment has been paid, all outstanding debts are written off. Note: Whilst you are under an IVA, you are not able to get a mortgage.
Typically, IVAs cost around £7,500. This includes a nominee fee (a fee for preparing your IVA) and a supervisor fee (a fee for running your IVA). These costs of your IVA are included in your monthly payments.
Financial circumstances change, especially over a 5 year period. If you’re struggling to repay your IVA, you must tell your IP straight away. They could work together with you to review your finances and suggest more flexible payment options.
If you miss repayments, you’re sent a notice of breach, and will be given three months to respond. When this happens, you need to explain why you’ve missed payments.
Your Insolvency Partner will try to rearrange the terms of your IVA with your creditors. If they won’t accept lower payments or if you’re still unable to make repayments, the IVA will fail and your debts will remain. What’s more, creditors can now take further action against you to get their money back. These actions included declaring bankruptcy,which is also an alternative to an IVA in some circumstances. If your IVA fails there are other debt management options.
Once your IVA repayments have ended, you’ll receive a certificate of completion. This is given to the Insolvency Service who will then remove your information from the Insolvency Register. Credit reference agencies should be automatically updated but it’s up to you to check. To do this, order a copy of your credit report and confirm that it’s up to date. Experian have a guide on how IVA’s affect your credit rating.
Now that your IVA has ended, your credit rating is back to zero. This means you now have to work to rebuild a positive credit rating. You may not yet be able to get the better deals on credit, but you can now start good credit habits which will positively affect your credit rating, such as repaying credit on time and in full.