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What is an IVA?

Emma Hayzen-Smith, Legal Services Manager, Thursday, 29 June 2023
Updated: Thursday, 29 June 2023

An Individual Voluntary Arrangement (IVA) can help you to manage and repay debts over a set period of time. Instead of struggling to pay off each of your bills separately, you can combine them into one manageable monthly payment.

An IVA is a legally binding agreement between you and your creditors and can only be set up by a qualified insolvency practitioner and approved by the court. If you keep up your payments until the end of your IVA, your debts will be paid off. If you fail to make a payment, your insolvency practitioner can apply to make you bankrupt.

But how does an IVA impact your credit score, and would it prevent you from applying for car finance? This article will explore what an IVA is and some important things you should know.

In this guide

What is an IVA?

IVA stands for “Individual Voluntary Arrangement” and is an insolvency solution – a legally binding agreement that ensures you will pay off your debts over time. In fact, IVAs were the most popular insolvency solution in England and Wales in 2021, accounting for 74% of individual formal debt solutions. That same year, 81,199 IVA proposals were approved.

IVAs allow you to roll several debts into one manageable payment. However, only certain types of debt can be included in an IVA.

IVA proposals typically involve agreeing to pay your creditors a set monthly amount over an agreed duration. Once an IVA is approved, you are legally bound to keep on top of these payments.

IVAs are only available in England, Wales, and Northern Ireland. If you live in Scotland, you could apply for a Trust Deed. This is a voluntary agreement between you and your creditors to pay off debt and is similar to an IVA. The other key differences are the duration and the amount of minimum unsecured debt.

How does an IVA work?

An IVA will freeze your debts and allow you to pay them off over an agreed period. Any money that you owe after the agreed period will be written off.

To set up an IVA, you’ll usually have to show proof that you have a regular long-term income to cover the costs during the agreed period (usually five to six years). If you own a home, during your second to last year of the IVA, you could be asked to remortgage your home and put this money towards your repayments. This could result in being released from your IVA a year early.

IVAs must be set up by a qualified insolvency practitioner. You’ll work closely with them to find a repayment amount that is affordable for you.

Once your creditors agree to the IVA, your IVA payment will come out of your account every month. However, this won’t go directly to your creditors but rather to your insolvency practitioner, who will then pay the agreed amount to your creditors.

Which debts can you pay off with an IVA?

IVAs can be used to pay off most common debts. However, creditors have a right to reject any debt inclusion they disagree with.

Debts that can be paid off using an IVA include (but are not limited to) the following:

  • Overdrafts
  • Catalogue debts
  • Personal loans
  • Council Tax arrears
  • Mortgage shortfalls
  • Some types of car finance debts
  • Credit and store cards
  • Money owed to HMRC (this includes national insurance contributions and income tax)

It is possible to pay off your mortgage or rent arrears. However, your landlord must first agree to it.

Which debts can’t you pay off with an IVA?

On the other hand, there are certain debts that you cannot pay off using an IVA. These off-limit debts include:

  • Magistrates’ court fines
  • Student loans
  • Child Maintenance Service or Child Support Agency arrears
  • Some types of car finance debts
  • TV licence payments

How to set up an IVA

Everyone’s circumstances are different, but below is an explanation of the IVA process:

1. Seek debt advice

This could be in the form of a credit counsellor, a debt advisor, or a debt charity. Either of these options will be able to assess your financial situation and determine the best course of action.

Of course, an IVA isn’t the only debt solution available. Other debt solutions include the Debt Respite Scheme, Debt Management Plans, Debt Relief Orders, and Administration Orders.

We can’t give financial advice and we can’t tell you whether or not an IVA is best for your situation. There are not-for-profit debt organisations that may be able to help, such as StepChange or the National Debt Helpline.

2. Meet with an insolvency practitioner

If a debt advisor has recommended that an IVA is the best option for you, you would then meet with an insolvency practitioner. This is a qualified professional trained in putting together IVA proposals.

Debt charities or advisors can often put you in touch with an insolvency practitioner, or you can find one yourself through the Insolvency Service. The Insolvency Service has a useful tool for finding an insolvency practitioner near you.

Before working with them, make sure they’re registered with the Insolvency Practitioners Association and/or regulated by the Financial Conduct Authority (FCA).

3. The insolvency practitioner will help set up an IVA proposal

You’ll have to provide the practitioner with information regarding your debts, monthly income, credit history, and overall financial situation. This is to help the insolvency practitioner work out a fair and manageable monthly payment amount. You’ll also have to provide details for all of your creditors.

Once the IVA proposal has been set up, the insolvency practitioner will contact all your creditors. They’ll arrange what is known as a “creditors’ meeting”.

4. The creditors' meeting

The creditors’ meeting can take place in person, remotely, via e-mail or by letter. During the creditors’ meeting, the creditors will be asked whether they accept or reject the IVA proposal. They also have the right to propose higher monthly payments. However, any changes to the proposal will need your approval first.

If the majority of the creditors accept the proposal, the IVA can go ahead. Those who rejected the proposal will now have to accept the terms of the IVA.

However, not all creditors have equal influence in this vote. The debtor owed the most has the biggest influence and can sway the vote. So, even if most creditors reject the proposal, but one creditor who is owed 75% accepts it, your IVA proposal will be approved. It will be applied to all the creditors, even those who disagree with the proposal.

5. Pay off your IVA

With the IVA in place, you need to keep up with the monthly payments. These will usually be taken from your bank account on the fixed monthly date you agreed with the insolvency practitioner.

Typically, an IVA proposal takes around 4-6 weeks to be arranged, proposed, and agreed upon.

IVA fees, costs, and charges

You will be charged a fee by your practitioner. The cost of an IVA varies between practitioners, but you’ll usually have to cover the costs of:

  • A nominee fee: the cost of putting forward the IVA proposal to your creditors
  • A supervisor fee: covering the ongoing costs of the IVA
  • Disbursements: expenses paid to third parties for insurance, registration fees, and other services.

Like IVAs, you don’t usually have to pay this fee as a lump sum. Instead, it tends to be included as part of your monthly repayments.

Will an IVA affect my credit score?

An IVA will be recorded on your credit report. Because your credit score is a snapshot of your credit report, your credit score will likely go down as a result of an IVA. Take a look at our guide exploring what affects your credit score for more information.

How long will an IVA stay on my credit report?

An IVA will stay on your credit report for six years from the date that it was approved. If you finish your IVA early, it won’t be removed from your credit report but will be marked as approved.

Individual Insolvency Register

Not only does an IVA affect your credit score, but it also means that you’ll be added to the Individual Insolvency Register. This register is available for public inspection and details your IVA arrangement as well as your personal information. You will remain on the individual insolvency register until three months after paying off your IVA.

How can I improve my credit score after an IVA?

While you may be debt-free after completing your IVA, you may now be left with a poor credit rating. Luckily, there are ways you can actively work to improve your credit score post-IVA. Some ways that might improve your score include:

  • Make your repayments in full and on time
  • Register for the electoral roll if you haven’t already
  • Avoid making too many finance applications in a short space of time.

Am I still eligible for credit with an IVA?

Some lenders might be reluctant to grant you credit with an IVA on your credit record, as they may see you as a higher risk. You might find it difficult to get approved for credit, and might be refused by mainstream lenders.

At the same time, an IVA represents the steps you’ve taken to rectify your financial problems. While this doesn’t clear your financial past, it does suggest that you’ve taken ownership of your financial situation and are trying to fix it.

If you’re looking for vehicle finance, you may need to use a specialist lender like Moneybarn, who specialise in bad credit car finance and IVA car finance.

Representative 30.5% APR.

Things to consider when applying for an IVA

When applying for an IVA, there are a number of things to bear in mind. It might be the perfect decision for you and your financial situation, but it is still important to weigh up any advantages and disadvantages to your situation.

We can’t advise you whether or not an IVA is right for your situation.

Below we’ve listed some potential advantages and disadvantages of taking out an IVA:

Potential advantages of taking out an IVA

  • Avoiding bankruptcy: IVAs help you avoid bankruptcy. This means you won’t have to sell your home or other assets. Generally, it puts you in far greater control than compared to bankruptcy.
  • Creditors won’t contact you: Once you agree to an IVA, you’ll only have to communicate with your insolvency practitioner. Your creditors will no longer be allowed to contact you to chase for payments.
  • Becoming debt-free: While you still have to pay off your debt yourself, an IVA makes it far more manageable. With it in place, you’ll be on your way to freedom from debt. While you are in an IVA, your creditors shouldn’t be able to charge interest on your debts.
  • Lower payments: Instead of paying several large debt repayments per month, you only have to focus on one lower repayment with an IVA. This makes paying off debt far more manageable.

Potential disadvantages of taking out an IVA

  • IVA payments could increase if your financial situation changes: If your income increases during an IVA, you may have to increase your IVA payments to match. Similarly, you may have to make increased payments if you gain any form of income, inheritance or profit while paying off an IVA. For example, if you move house, the profit made from selling your old home might have to go toward your IVA.
  • Creditors can reject IVAs: Deciding that you want an IVA isn’t enough to set one up. If your creditors reject your proposal, there’s little you can do about it. It can sometimes take just one creditor to reject your proposal for the IVA to be disapproved.
  • Circumstances can change: You may find yourself earning less than you did when you agreed to the terms of the IVA. While your practitioner may be able to secure you a repayment holiday, this is not a guarantee. Defaulting on your IVA can cause your credit score to drop even further. It would also mean finding an alternative repayment plan.

FAQs about IVAs

There are no rules stating that you specifically can’t go on holiday while paying off an IVA. However, the terms of an IVA do suggest that you must spend money wisely, budget accordingly, and avoid unnecessary luxuries. If it’s possible to still budget accordingly and go on holiday, you could plan a trip while paying off an IVA.

If you take out an IVA, you will not have to sell any of your assets – your vehicle included. Your insolvency practitioner will make recommendations about including assets in your IVA, but you don’t have to agree to any of these.

If you find yourself earning more money than you did at the start of the IVA, you can arrange for an increase in your payments.

Alternatively, if you have extra money in the short term, you could temporarily increase your payment size. This may help to shorten the time required to pay off your IVA or allow you to reduce your payment size further down the line.

Sometimes your financial situation can change. If it comes to a point where you can’t afford essential living costs, you need to inform your practitioner immediately. They may be able to arrange a payment holiday with your practitioners, which will allow you to skip a few payments.

Alternatively, they may be able to arrange a payment reduction, but this will lengthen the duration of your IVA.

An Individual Voluntary Arrangement (IVA) can help you to manage and repay debts over a set period of time. Instead of struggling to pay off each of your bills separately, you can combine them into one manageable monthly payment.

An IVA is a legally binding agreement between you and your creditors and can only be set up by a qualified insolvency practitioner and approved by the court. If you keep up your payments until the end of your IVA, your debts will be paid off. If you fail to make a payment, your insolvency practitioner can apply to make you bankrupt.

But how does an IVA impact your credit score, and would it prevent you from applying for car finance? This article will explore what an IVA is and some important things you should know.

In this guide

What is an IVA?

IVA stands for “Individual Voluntary Arrangement” and is an insolvency solution – a legally binding agreement that ensures you will pay off your debts over time. In fact, IVAs were the most popular insolvency solution in England and Wales in 2021, accounting for 74% of individual formal debt solutions. That same year, 81,199 IVA proposals were approved.

IVAs allow you to roll several debts into one manageable payment. However, only certain types of debt can be included in an IVA.

IVA proposals typically involve agreeing to pay your creditors a set monthly amount over an agreed duration. Once an IVA is approved, you are legally bound to keep on top of these payments.

IVAs are only available in England, Wales, and Northern Ireland. If you live in Scotland, you could apply for a Trust Deed. This is a voluntary agreement between you and your creditors to pay off debt and is similar to an IVA. The other key differences are the duration and the amount of minimum unsecured debt.

How does an IVA work?

An IVA will freeze your debts and allow you to pay them off over an agreed period. Any money that you owe after the agreed period will be written off.

To set up an IVA, you’ll usually have to show proof that you have a regular long-term income to cover the costs during the agreed period (usually five to six years). If you own a home, during your second to last year of the IVA, you could be asked to remortgage your home and put this money towards your repayments. This could result in being released from your IVA a year early.

IVAs must be set up by a qualified insolvency practitioner. You’ll work closely with them to find a repayment amount that is affordable for you.

Once your creditors agree to the IVA, your IVA payment will come out of your account every month. However, this won’t go directly to your creditors but rather to your insolvency practitioner, who will then pay the agreed amount to your creditors.

Which debts can you pay off with an IVA?

IVAs can be used to pay off most common debts. However, creditors have a right to reject any debt inclusion they disagree with.

Debts that can be paid off using an IVA include (but are not limited to) the following:

  • Overdrafts
  • Catalogue debts
  • Personal loans
  • Council Tax arrears
  • Mortgage shortfalls
  • Some types of car finance debts
  • Credit and store cards
  • Money owed to HMRC (this includes national insurance contributions and income tax)

It is possible to pay off your mortgage or rent arrears. However, your landlord must first agree to it.

Which debts can’t you pay off with an IVA?

On the other hand, there are certain debts that you cannot pay off using an IVA. These off-limit debts include:

  • Magistrates’ court fines
  • Student loans
  • Child Maintenance Service or Child Support Agency arrears
  • Some types of car finance debts
  • TV licence payments

How to set up an IVA

Everyone’s circumstances are different, but below is an explanation of the IVA process:

1. Seek debt advice

This could be in the form of a credit counsellor, a debt advisor, or a debt charity. Either of these options will be able to assess your financial situation and determine the best course of action.

Of course, an IVA isn’t the only debt solution available. Other debt solutions include the Debt Respite Scheme, Debt Management Plans, Debt Relief Orders, and Administration Orders.

We can’t give financial advice and we can’t tell you whether or not an IVA is best for your situation. There are not-for-profit debt organisations that may be able to help, such as StepChange or the National Debt Helpline.

2. Meet with an insolvency practitioner

If a debt advisor has recommended that an IVA is the best option for you, you would then meet with an insolvency practitioner. This is a qualified professional trained in putting together IVA proposals.

Debt charities or advisors can often put you in touch with an insolvency practitioner, or you can find one yourself through the Insolvency Service. The Insolvency Service has a useful tool for finding an insolvency practitioner near you.

Before working with them, make sure they’re registered with the Insolvency Practitioners Association and/or regulated by the Financial Conduct Authority (FCA).

3. The insolvency practitioner will help set up an IVA proposal

You’ll have to provide the practitioner with information regarding your debts, monthly income, credit history, and overall financial situation. This is to help the insolvency practitioner work out a fair and manageable monthly payment amount. You’ll also have to provide details for all of your creditors.

Once the IVA proposal has been set up, the insolvency practitioner will contact all your creditors. They’ll arrange what is known as a “creditors’ meeting”.

4. The creditors' meeting

The creditors’ meeting can take place in person, remotely, via e-mail or by letter. During the creditors’ meeting, the creditors will be asked whether they accept or reject the IVA proposal. They also have the right to propose higher monthly payments. However, any changes to the proposal will need your approval first.

If the majority of the creditors accept the proposal, the IVA can go ahead. Those who rejected the proposal will now have to accept the terms of the IVA.

However, not all creditors have equal influence in this vote. The debtor owed the most has the biggest influence and can sway the vote. So, even if most creditors reject the proposal, but one creditor who is owed 75% accepts it, your IVA proposal will be approved. It will be applied to all the creditors, even those who disagree with the proposal.

5. Pay off your IVA

With the IVA in place, you need to keep up with the monthly payments. These will usually be taken from your bank account on the fixed monthly date you agreed with the insolvency practitioner.

Typically, an IVA proposal takes around 4-6 weeks to be arranged, proposed, and agreed upon.

IVA fees, costs, and charges

You will be charged a fee by your practitioner. The cost of an IVA varies between practitioners, but you’ll usually have to cover the costs of:

  • A nominee fee: the cost of putting forward the IVA proposal to your creditors
  • A supervisor fee: covering the ongoing costs of the IVA
  • Disbursements: expenses paid to third parties for insurance, registration fees, and other services.

Like IVAs, you don’t usually have to pay this fee as a lump sum. Instead, it tends to be included as part of your monthly repayments.

Will an IVA affect my credit score?

An IVA will be recorded on your credit report. Because your credit score is a snapshot of your credit report, your credit score will likely go down as a result of an IVA. Take a look at our guide exploring what affects your credit score for more information.

How long will an IVA stay on my credit report?

An IVA will stay on your credit report for six years from the date that it was approved. If you finish your IVA early, it won’t be removed from your credit report but will be marked as approved.

Individual Insolvency Register

Not only does an IVA affect your credit score, but it also means that you’ll be added to the Individual Insolvency Register. This register is available for public inspection and details your IVA arrangement as well as your personal information. You will remain on the individual insolvency register until three months after paying off your IVA.

How can I improve my credit score after an IVA?

While you may be debt-free after completing your IVA, you may now be left with a poor credit rating. Luckily, there are ways you can actively work to improve your credit score post-IVA. Some ways that might improve your score include:

  • Make your repayments in full and on time
  • Register for the electoral roll if you haven’t already
  • Avoid making too many finance applications in a short space of time.

Am I still eligible for credit with an IVA?

Some lenders might be reluctant to grant you credit with an IVA on your credit record, as they may see you as a higher risk. You might find it difficult to get approved for credit, and might be refused by mainstream lenders.

At the same time, an IVA represents the steps you’ve taken to rectify your financial problems. While this doesn’t clear your financial past, it does suggest that you’ve taken ownership of your financial situation and are trying to fix it.

If you’re looking for vehicle finance, you may need to use a specialist lender like Moneybarn, who specialise in bad credit car finance and IVA car finance.

Representative 30.5% APR.

Things to consider when applying for an IVA

When applying for an IVA, there are a number of things to bear in mind. It might be the perfect decision for you and your financial situation, but it is still important to weigh up any advantages and disadvantages to your situation.

We can’t advise you whether or not an IVA is right for your situation.

Below we’ve listed some potential advantages and disadvantages of taking out an IVA:

Potential advantages of taking out an IVA

  • Avoiding bankruptcy: IVAs help you avoid bankruptcy. This means you won’t have to sell your home or other assets. Generally, it puts you in far greater control than compared to bankruptcy.
  • Creditors won’t contact you: Once you agree to an IVA, you’ll only have to communicate with your insolvency practitioner. Your creditors will no longer be allowed to contact you to chase for payments.
  • Becoming debt-free: While you still have to pay off your debt yourself, an IVA makes it far more manageable. With it in place, you’ll be on your way to freedom from debt. While you are in an IVA, your creditors shouldn’t be able to charge interest on your debts.
  • Lower payments: Instead of paying several large debt repayments per month, you only have to focus on one lower repayment with an IVA. This makes paying off debt far more manageable.

Potential disadvantages of taking out an IVA

  • IVA payments could increase if your financial situation changes: If your income increases during an IVA, you may have to increase your IVA payments to match. Similarly, you may have to make increased payments if you gain any form of income, inheritance or profit while paying off an IVA. For example, if you move house, the profit made from selling your old home might have to go toward your IVA.
  • Creditors can reject IVAs: Deciding that you want an IVA isn’t enough to set one up. If your creditors reject your proposal, there’s little you can do about it. It can sometimes take just one creditor to reject your proposal for the IVA to be disapproved.
  • Circumstances can change: You may find yourself earning less than you did when you agreed to the terms of the IVA. While your practitioner may be able to secure you a repayment holiday, this is not a guarantee. Defaulting on your IVA can cause your credit score to drop even further. It would also mean finding an alternative repayment plan.

FAQs about IVAs

There are no rules stating that you specifically can’t go on holiday while paying off an IVA. However, the terms of an IVA do suggest that you must spend money wisely, budget accordingly, and avoid unnecessary luxuries. If it’s possible to still budget accordingly and go on holiday, you could plan a trip while paying off an IVA.

If you take out an IVA, you will not have to sell any of your assets – your vehicle included. Your insolvency practitioner will make recommendations about including assets in your IVA, but you don’t have to agree to any of these.

If you find yourself earning more money than you did at the start of the IVA, you can arrange for an increase in your payments.

Alternatively, if you have extra money in the short term, you could temporarily increase your payment size. This may help to shorten the time required to pay off your IVA or allow you to reduce your payment size further down the line.

Sometimes your financial situation can change. If it comes to a point where you can’t afford essential living costs, you need to inform your practitioner immediately. They may be able to arrange a payment holiday with your practitioners, which will allow you to skip a few payments.

Alternatively, they may be able to arrange a payment reduction, but this will lengthen the duration of your IVA.

 
Emma Hayzen-Smith, Legal Services Manager
Bringing you guides to complicated finance topics so you understand how bad credit affects you.
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