Individual Voluntary Agreement or popularly known as IVA, is a legal contract between the debtor and their lenders. An Individual Voluntary Agreement is a payment plan that allows a debtor to pay their debts according to their ability over 5 years. The amount to be paid is computed by taking into consideration the debtor’s income, their assets, their expenses and cash out flow. The surplus is then used to pay the creditors. An Individual Voluntary Agreement is a better option to bankruptcy and should not be mistaken for a debt management plan.
An IVA is applicable to individuals who have debts more than £15,000, are having problems paying their debts or are resorting to more credit to pay their existing liabilities. To be eligible the individual must be able to pay at least £200 per month, as creditors will require at least 25% of their money paid back, before accepting an IVA. Making the decision to get an Individual Voluntary Agreement, however, is not easy. A person needs advice on what options are open to them to get out of their difficult financial situation. An insolvency practitioner can assist with these decisions. An individual can also take an IVA Test online to determine if they qualify for an IVA as an option to settle their debts.
How will an IVA affect my credit rating and how long does it stay on your Credit Report?
An Individual Voluntary Agreement may have a negative impact on a person’s credit rating. By entering into an Individual Voluntary Agreement an individual is entering a new fiscal contract and are therefore defaulting on their present debts. This will last for 6 years because any negative record on a person’s credit file stays for 6 years before being cleared. This, however, will not affect the borrower since under an IVA, which lasts for 5 years, the debtor is not allowed to acquire any new credit, and no prospective creditor will access their credit file. An IVA will show on your credit report from Experian, TransUnion and Equifax.
After the 5-year term of an Individual Voluntary Agreement a debtor will still have to contend with their negative credit record for another year. Some financial experts however believe that being under an Individual Voluntary Agreement is a way of repairing a bad credit record.
Which Debt Charities can help?
An Individual Voluntary Agreement is an alternative to bankruptcy. Although it will influence an individual’s credit rating, it is one step closer to helping an individual achieve financial freedom and stability. Seeking the advice of professionals such as Stepchange or National Debt Line is a good first call.
How to Improve your Credit Score after an IVA?
IVA are removed from your credit report after 6 years as it limits how much credit you can access during the period it is in force your score will be low, so check out our article on improving your credit score.
The Individual Voluntary Agreement process
- The first step is to consult an Insolvency Practitioner who will assess the borrower’s present financial situation by reviewing their financial records, bank statements, bills, credit card payments and the like to determine what is an affordable amount that the debtor can repay their creditors on a regular basis.
- The debtor should then, contact the lenders and present them with the proposal. It should not be an amount that is too low that the creditors will automatically reject the offer. Under an Individual Voluntary Agreement, however, the creditors are being offered a better option to recover their money than bankruptcy would offer. An Individual Voluntary Agreement is a long process and may take several months to perfect the agreement.
- An IVA is suitable for individuals who are insolvent, meaning individuals are struggling to pay off debts and the equity on their assets is not sufficient to cover the debts. For an IVA to be approved a 75% majority of creditors need to vote in favour of the IVA.
The pros and cons of an Individual Voluntary Agreement
Like all other debt settlement schemes, an Individual Voluntary Agreement has its advantages and disadvantages. Below is a list of advantages and disadvantages of an Individual Voluntary Agreement:
Advantages:
- An Individual Voluntary Agreement will protect a debtor from any court action from their creditors; also, the creditors will not be allowed to send collection letters to the debtor once and IVA has been approved
- An Individual Voluntary Agreement will result in freezing interest and other financial charges on unsecured loans
- An Individual Voluntary Agreement is a private agreement and is therefore not publicised like bankruptcy and will therefore not carry any social stigma
- An Individual Voluntary Agreement covers all unsecured loans
- The agreed payment is an amount affordable to the borrower
- After completion of the Individual Voluntary Agreement the debtor will be debt-free
- Knowing exactly how much is involved will give the debtor the chance to manage and control their finances more efficiently
- After the completion of the Individual Voluntary Agreement, a debtor can prove that they are able to settle debts, thereby improving their credit rating and allowing them to borrow funds again
- Being forced to operate on a budget will help a debtor learn how to save money
- Since it is legally binding, the creditors cannot arbitrarily cancel the agreement
- An Individual Voluntary Agreement does not have an unfavorable effect to a debtor’s employment or profession
- Under an Individual Voluntary Agreement creditor can claim bad debts as a tax relief and is therefore favored by creditors
- Under an Individual Voluntary Agreement even creditors who did not vote for the agreement are automatically included according to the law
Disadvantages
- Since all assets will be declared, a creditor has the right to demand the release of an expensive asset in favor of the creditors.
- A debtor will be restricted to a budget for the term of the agreement
- A debtor will be required to release their equity on some assets towards the last six months of the Individual Voluntary Agreement
- Any extra funds that a debtor will acquire, such as inheritance, lottery winnings should be declared to the Individual Voluntary Agreement supervisor
- Individual Voluntary Agreements are recorded on a public register and will most likely impact on a debtor’s credit rating
- The debt should be at least £12,000 and the monthly payment at least £180
- While the Individual Voluntary Agreement is being enforced the debtor is not allowed to apply for unsecured credit
- Credit rating of a debtor is damaged while an Individual Voluntary Agreement is enforced, although after a year of paying through IVA a debtor will find that their credit rating is slowly improving
- Under an Individual Voluntary Agreement all debts should be included. Debtors cannot make a separate individual arrangement with any single creditor, which could be done under a debt management plan
- An Individual voluntary agreement takes 5 years to complete unlike a bankruptcy which is 3 years
When is an Individual Voluntary Agreement not a suitable option?
An individual voluntary agreement is not ideal for individuals who:
- Have an accumulated debt of less that £15,000. For individuals with a debt of less than £15,000 other alternatives such as a debt management plan can be considered.
- Have a debt that is not a UK debt, and is not in sterling pounds
- An IVA is not suitable for individuals who are not residents of England, Wales or North Ireland.
- Cannot make a minimum of £200 in repayments each month to reduce the debt. Creditors require a minimum of 25% repayment of your debt before they agree to an IVA.
- An IVA is not suitable for individuals who can not prove that they have a regular income flow, and who are struggling to meet their basic living expenses.
