Key Takeaways
- An IVA is a formal, legally binding agreement between you and your creditors
- You make affordable payments towards qualifying debts over an agreed period
- Once an IVA is approved, creditors included in it are bound by its terms
- An IVA can affect your credit record and will appear on the Individual Insolvency Register
- A licensed insolvency practitioner must set up and supervise an IVA
- If you successfully complete the IVA, remaining qualifying debts included in it are written off
Everything you need to know about IVAs
It’s not uncommon for individuals or small businesses to face financial difficulty. For sole traders in particular, financial problems can be difficult because they are personally responsible for their business debts. If problems aren’t dealt with early, debt can continue to build and increase the risk of further action from creditors.
In these situations, an Individual Voluntary Arrangement, or IVA, could be one option to consider.
An IVA can relieve some of the immediate financial pressure by creating a formal arrangement between you and your creditors. Below, McAlister & Co explains what an IVAs is and how it work, what the process involves, the advantages and disadvantages, and whether you can continue to be self-employed during an IVA.
What is an IVA and how does it work?
An IVA is a formal and legally binding agreement between an individual and their creditors. You agree to make affordable payments towards all or part of your qualifying debts, normally through a licensed insolvency practitioner who distributes the money to creditors.
An IVA can be considered as an alternative to bankruptcy and may give you more control over your assets than bankruptcy. The amount you repay and how long your IVA lasts will depend on your circumstances and the terms of the proposal agreed with your creditors.
Under the current standard Consumer IVA Protocol, arrangements are generally proposed for 60 months, or 72 months in certain circumstances involving a beneficial interest in a family home. Bespoke IVAs may operate differently.
Debts that may be included in an IVA can include:
- Personal loans
- Credit card debts
- Overdrafts
- Store cards
- Council Tax arrears
- Utility arrears
- Certain tax debts
- Other qualifying unsecured debts
Not every type of debt can be included, so your individual liabilities will need to be assessed before an IVA is proposed. If you successfully complete the arrangement, you will no longer owe the qualifying debts included in the IVA.
What is bankruptcy?
Bankruptcy is a procedure that is dealt with in a much shorter time period than an IVA, with most individuals discharged from a bankruptcy order within 12 months. However, during bankruptcy your individual assets will be forfeited, and bankruptcy can offer more severe consequences for your financial status.
Whilst both are formal debt processes, IVAs are less extreme than a bankruptcy petition. Bankruptcy can offer more severe consequences for your financial status, and can impact your future career too, with many industries unable to hire those who have filed for bankruptcy.
The social status regarding an IVA is also seen as less damaging than personal bankruptcy, and an IVA offers more flexibility, too. During an IVA, you can continue to use your bank account and you won’t be forced to sell your home.
However, if you file for bankruptcy your bank account will be closer and if you have any equity in your home, it will be highly possible you have to sell.
How does an IVA work?
An IVA could be the right solution for someone with a regular household income who is struggling to keep up repayments on their unsecured debt. An IVA could also be the right solution for debtors who are sole traders, or self-employed. There is no minimum unsecured debt for someone entering an IVA, but it is usually £15,000 or more, and in most cases, entering an IVA will allow you to carry on trading which means you can be self-employed with an IVA, making it a more attractive alternative to bankruptcy.
In an IVA, you repay only what you can afford to, for a fixed period of time; once that period is complete, any remaining debt is written off. For an IVA, you will need to appoint an adviser to guide you through the process and communicate with your creditors on your behalf.
They will prepare the IVA proposal, deal with your creditors and collect any necessary information to go forward. You will also need a licensed insolvency practitioner to present the proposal to creditors. The process works as follows:
Step One - Assessment
First, your situation will need to be assessed by a licensed insolvency practitioner to see if you are eligible to enter into an IVA. If you are, the IVA process can begin.
Step Two - Proposal
A proposal will then be drawn up based on the information you provide. In the proposal, you will put forward the best offer of repayment that you can afford. While you can write the proposal yourself, it is best to seek advice from an insolvency practitioner as there are complex legal processes involved.
For example, the final proposal must show realistic cashflow, sales and cost figures, with no high expectations of future sales or contracts. In addition, the proposal will need to include reasons why the business is insolvent.
The creditors will also need to see a statement of affairs to help them make a decision and include details on the expected outcome of the IVA compared to other options such as bankruptcy.
Once everything is prepared, a moratorium could be applied. It will be circulated among creditors at the same time a moratorium is applied, protecting the sole trader against legal actions during the process up until the creditors’ meeting which will take place a minimum of 14 days after the proposal has been posted to creditors.
Step Three - Approval
A copy of your proposal will be sent to each creditor who will be asked to vote to accept or reject it. They will have 14 days to consider the proposal and to put forward any objections or concerns before the creditors’ meeting.
At the meeting, the proposal can be questioned and modified as the nominee and creditors see fit - and if a majority accept, the IVA is approved and will be legally binding for all creditors.
Step Four - Payments
Once the IVA is approved, you will start to make the agreed payments. Agreed payments are reviewed each year to see if you can pay more or whether you need to ask your creditors to agree to a reduction in payments.
Step Five - Completion
When all the agreed payments have been completed, the remainder of the debt will be cleared.
What are the pros and cons of an IVA?
As with any formal insolvency procedure, there are advantages and disadvantages to entering an IVA. These should be carefully weighed up before deciding whether it is right for you.
Advantages:
- Interests of debts will be frozen
- You can reduce debt by paying a proportion of what is owed
- You may be able to retain assets such as your home
- At the end of the IVA period remaining debts are written off
- It is not advertised and is discrete, so your reputation is unharmed
- It gives an opportunity to review your business
- Creditors may get more in return over the long run
- Creditors cannot make any additional demands for payment
- It will be completed after a certain period after which you can build your credit report
- It offers fewer consequences for your career than filing for bankruptcy
- There is also more protection if you own your business
Disadvantages:
- You will need to stick to the budget for the IVA period
- You may be asked to release some equity from your property
- IVAs are likely to appear on your credit file
- If you fail to keep up payments, you could be made bankrupt
- It may be difficult to obtain future credit
- The more complex the case, the higher the fee
- It won’t simply turnaround your business; you need to be willing to change
- It lasts longer than a bankruptcy order
- You will be included on the insolvency register
How we can help
At McAlister & Co, we understand that managing debt can be stressful and complicated. Entering into an Individual Voluntary Arrangement with your creditors could provide a structured way to deal with debts you cannot afford to repay in full.
Our experienced IVA team can assess your circumstances, explain the options available and guide you through the proposal and creditor approval process. McAlister & Co can also provide confidential advice if you are self-employed or a sole trader and are concerned about how an IVA could affect the future of your business.
If you are still asking what is an IVA and how does it work, contact McAlister & Co today. Our experienced team can explain whether an IVA could be suitable for your circumstances and help you understand the next steps.
Frequently Asked Questions
What happens to my debts in an IVA?
You make agreed payments towards qualifying debts included in the IVA. Once you successfully complete the arrangement, you will no longer owe the remaining qualifying debts covered by it.
How long does an IVA last?
The exact duration depends on the proposal. Under the current Consumer IVA Protocol, standard arrangements are generally proposed for 60 months, or 72 months in certain circumstances involving equity in a family home. Other IVAs can have different terms.
Will an IVA affect my credit rating?
Yes. An IVA will affect your ability to obtain credit and will appear on your credit file. It is also recorded on the Individual Insolvency Register while the arrangement is active.
Can I keep my home if I enter an IVA?
An IVA can provide more control over your assets than bankruptcy, but property and available equity may still need to be considered as part of the proposal. The exact treatment of your home will depend on your circumstances and the terms of the IVA.
What is an IVA and how does it work if I am self-employed?
An IVA works in broadly the same way for a self-employed person, but your business income, expenses and future trading position will also need to be assessed. In many cases, you may be able to continue running your business while the IVA is in place.
Can you be self-employed with an IVA?
In many cases, yes. An IVA can be particularly relevant to sole traders because personal and business finances are closely connected. Unlike a limited company, a sole trader is personally responsible for the debts of the business.
An IVA may allow you to carry on trading while dealing with qualifying debts through the arrangement. However, the viability of the business, your expected income and your ability to maintain the agreed payments will all need to be considered.
