Definition
An Individual Voluntary Arrangement (IVA) is a formal agreement made between a debtor and their creditors, typically implemented when the debtor struggles to repay their debts. Under the IVA, the debtor agrees to pay a fixed amount towards clearing their debt for a set period, often over five to six years. The remaining debt is usually written off at the end of this period.
Key Takeaways
- An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement between you and your creditors to pay back your debts over a period of time. This is an alternative to bankruptcy.
- IVA allows you to consolidate all your debts into a single monthly payment, which is then distributed among your creditors. The payment is based on what you can afford, and the agreement usually lasts five to six years.
- After the successful completion of the IVA agreement, any remaining debt is typically written off. This means you won’t need to pay back the remaining balance, offering you a fresh start financially.
Importance
An Individual Voluntary Arrangement (IVA) is a crucial finance term as it represents a formal agreement between a debtor and their creditors, enabling the debtor to repay their debts over a specified period. IVA is significant because it allows financially struggling individuals to avoid bankruptcy and remain in control of their assets, which might include their houses and cars.
It can help to reduce the amount of debt, freeze the interest, and spread the repayment over a more extended period making it affordable. Moreover, creditors also benefit from IVAs as they could receive more money compared to what they would from bankruptcy proceedings.
Lastly, it provides legal protection to the debtor against any further actions from creditors involved in the agreement. Hence, being a mutually beneficial solution, the concept of IVA is vital in the finance world.
Explanation
Individual Voluntary Arrangement (IVA) is primarily used as a debt solution to avoid bankruptcy. A debtor who is unable to pay their debts as they become due enters into an IVA with their creditors to pay off their debts over a specific period of time.
It allows individuals in financial distress to come to an arrangement with their creditors regarding the repayment of their debts. The debtor proposes an offer in respect of what they can afford to pay, which might involve monthly payments or raising funds to pay a lump sum, or perhaps a combination of the two.
The purpose of an Individual Voluntary Arrangement is to allow individuals overcome their financial predicaments while causing the least possible damage to their financial credibility. It gives them an opportunity to pay off the debts in a manageable way.
Importantly, by entering into an IVA, they can avoid the severe consequences of bankruptcy such as the forced sale of their home. It also provides creditors with a better return than they would receive in bankruptcy and allows for more flexibility in the repayment of debts.
Examples of Individual Voluntary Arrangement
Case of John:John was one of the prosperous businessmen in his community; however, due to a sudden depression in the market and wrong investment decisions, he faced a huge financial crisis. His company couldn’t repay the business loans and started sinking into debt. His creditors were constantly demanding their money back but John was unable to settle his debts. In this precarious situation, he took advice from a financial counselor who suggested him to opt for an Individual Voluntary Arrangement (IVA). With the help of the IVA, John was able to propose a repayment plan to his creditors where he could pay off his debts in smaller, manageable amounts over a certain period of time. This agreement helped him avoid bankruptcy and saved his business from being liquidated.
Case of Sarah:Sarah, an IT consultant, ran into financial trouble after a period of unemployment and high medical expenses due to an unexpected health issue. The situation led her to fall behind on her mortgage, credit card payments, and other bills. She was on the brink of losing her home when she found out about the Individual Voluntary Arrangement. With the help of an insolvency practitioner, she negotiated an agreeable payment plan that was based on her income and what she could reasonably afford to repay. Over five years, Sarah was able to clear her debts without losing her home.
Case of Martin:Martin was a freelance photographer who had taken out multiple credit cards to finance his business-related equipment and travel. He fell into heavy credit card debt when there was a decline in projects because of the global pandemic. The debts accumulated with interest and he was struggling to make the minimum repayments. After consulting a debt advisor, he decided to enter into an Individual Voluntary Arrangement. The advisor acted as a mediator and helped him come to an arrangement to pay back the credit card companies a smaller, more manageable amount each month over six years. Martin avoided bankruptcy and got on track to be debt-free.
FAQs about Individual Voluntary Arrangements
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement between you and your creditors to pay back your debts over a period of time.
How does an IVA work?
An IVA is set up by a qualified professional known as an insolvency practitioner (IP). Your IP will work out what you can afford to repay and how long the IVA lasts. You will then make regular payments to your IP, who will divide this money between your creditors.
Can an IVA affect my credit rating?
Yes, an IVA will stay on your credit file for six years from the date it starts. This can hamper your ability to obtain credit during this period.
What are the risks associated with an IVA?
While an IVA can help you manage your debts, it also comes with risks. This includes credit rating impact, potential for home equity release, and stringent budgeting requirements. If you fail to keep up with your payments, your IVA could fail and you may end up bankrupt.
What is the impact of an IVA on my home?
If you own your home and you start an IVA, you may have to remortgage it to release some of the equity. If you can’t remortgage, your IVA may be extended for 12 months. It’s important to discuss these risks with an insolvency advisor or a debt charity.
Related Entrepreneurship Terms
- Debt Relief Order
- Bankruptcy
- Insolvency Practitioner
- Creditor’s Meeting
- Unsecured Debt
Sources for More Information
- Government of the United Kingdom: This government portal provides a wealth of information on various topics, including the Individual Voluntary Arrangement (IVA) as it applies in the UK.
- Citizens Advice Bureau: The website provides free, independent, confidential, and impartial advice on rights and responsibilities, including financial matters such as an IVA.
- Money Advice Service: This unbiased free service provides advice and guides to help improve your finances, including information about IVA.
- StepChange Debt Charity: This UK’s leading debt charity provides free expert advice and practical solutions to problem debt, including comprehensive information about IVA.
