A 60-second guide to IVAs (Individual Voluntary Arrangements)
An alternative to bankruptcy, an IVA is a legally binding formal agreement that helps people write off unsecured debt that they cannot afford to repay. In return, they have to pay a fixed amount every month for (normally) 5 years, based on the maximum they can afford after they’ve paid for mortgage / rent, food, utilities, etc.
Normally, people can only enter into an IVA if they have £15,000 or more of unsecured debt which they can’t afford to pay back – and if they have a reliable income.
An IVA works like this:
1) The person in debt talks to an Insolvency Practitioner (IP). If the IP thinks that an IVA is their best option, they work together to draw up a proposal telling the creditors how much they would receive if the IVA went ahead.
2) For the IVA to get started, the proposal must be approved by creditors who collectively ‘own’ 75% of the debt – so it must show that the IVA would bring them more than (for example) bankruptcy.
3) The person then makes the agreed repayment every month – normally, for 5 years. Their creditors stop charging interest and stop (or promise not to start) any legal action against them.
4) If the person is a homeowner, they’ll probably have to free up some of the equity in their home in the 4th year of the IVA to pay to their creditors.
5) The IVA can fail if the person misses 3 payments – but if they keep up the payments for 5 years, the IVA comes to a successful conclusion. The creditors write off the rest of the debt, and the person becomes officially debt free (apart from any secured debt / any unsecured debt that wasn’t included in the IVA).
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