How do I set up an IVA?

1 May 2009

An IVA (Individual Voluntary Arrangement) is a formal, legally binding agreement between a borrower and their unsecured lenders. Basically, it provides the borrower with a realistic, affordable way to clear their debt - having a portion of it written off, in return for a commitment to repay as much as they can over (in most cases) five years.

How do I set up an IVA?

If you think an IVA could be the solution to your debt problems, you should start by calling an Insolvency Practice - an organisation which is qualified to carry out IVAs. Once you`ve spoken to them about your finances (details of income, expenditure, debts, property owned, etc.), they`ll be able to tell you whether or not an IVA is a realistic option for you.

If they think an IVA is the best solution for you, they`ll work with you to draw up an IVA Proposal, a formal offer that tells your lenders exactly what you`d be able to pay in an IVA.

Your lenders will then have the chance to decide whether or not they approve of the IVA Proposal. In order for the IVA to go ahead, it must be approved by voting creditors who collectively own 75% of the debt.

If the IVA is approved by enough lenders, it can begin. This means you`ll make just one monthly payment, instead of a separate payment to each of your lenders. What`s more, the amount you pay per month will be lower, as it`ll be based on how much you can realistically afford after you`ve accounted for your mortgage/rent, utility bills and other essential expenses. (This is why IVAs aren`t appropriate for people whose financial situation isn`t stable and who can`t commit to making regular payments.)

The IVA should continue for five years: as long as you keep making those payments, your lenders will not be allowed to take any action against you. If you earn extra money (e.g. pay-rise, bonus or commission), you will be required to give up some of this. If you`re a homeowner, you may be expected to free up some of the equity in your home in the final year of the IVA (in the 54th month), so you can contribute more to the IVA - but you`ll be very unlikely to lose your home (something which would almost certainly happen if you were declared bankrupt).

Assuming all goes well, in 60 months (in most cases), you`ll make your final payment and your IVA will come to a successful conclusion. Since you`ve lived up to your side of the agreement and paid everything you agreed to pay, any outstanding unsecured debt will be written off.

Please note that your IVA will remain on your credit report for one more year - i.e. for six years in total, starting when the IVA began - making credit harder to obtain and more expensive.