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IVAs and how they work

Last updated: 10 May 2022

What is an IVA? Or is it called an AVI? Financial jargon is somewhat like the calculations required in the painful thrust of Sudoku! But fear not – here comes your moment of exasperation. IVAs are uncomplicatedly defined as “Individual Voluntary Arrangement”. As describes IVAs is a legally binding agreement between you and your creditor. It allows an individual in financial difficulties to make a formal proposal to settle their debt within a reasonable and fixed period of time (normally 5 years).

Any interest and debt charges will be frozen and creditors will be prohibited from demanding additional payments. An IVA involves making monthly payments based on an affordable disposable income. Once the final payment is made, any outstanding debt is legally written off. As thus the arrangement can write off up to 75% of your debts (subject to your circumstances).

IVAs can be the most practical solution, depending on the individual’s circumstances. IVAs have a minefield of attributes that are worth noting. For instance an IVA will: prevent any legal actions against you, freeze debt interest and charges, cancel out any existing CCJs, cease demanding letters and phone calls from your creditors. Your case will also be strictly confidential and you will not be published in the local paper, therefore no knock-on-effect on your professional life. In regards to payment it will require one solid repayment fee, usually a minimum of £200 per month.

One other comforting thought, is that your creditors will deal with insolvency practitioners, thus relieving you of phone calls and written reminders. All remaining debts will be written off at the end of an IVA, if fulfilled successfully. Another factor is IVA creditors cannot change the conditions of the agreement unless approved by you, and you will be involved in the choice of assets made available to creditors. As long as 75% of your creditors all agree with the terms of your IVA, the other 25% are legally bound to the agreement as well. But lastly, but most importantly it will give you the opportunity to give yourself a fresh credit slate.

Though the benefits are incredibly enticing, there are some factors that should be considered prior to your final decision. As the well repeated adage would suggest, ‘where there is good there is bad’. IVAs unfortunately fall in that pool of thoughts. One of the disadvantages of IVA is that you may require the possible Release of Home Equity. This means, if you have any equity in your property (or any other significant valuable assets), you may be required to release some or all of this as part of the IVA agreement. Also, in taking on an IVA it may also result to Minimum Level of Debt. Normally you will only be able to undertake an IVA if your total unsecured debt is more than £15,000. In addition, you will need to be able to afford a monthly payment of at least £200. Having undergone an IVA, there is no unsecured borrowing during the arrangement while you are in an IVA. You will not be able to use your store or credit cards. These must be cut up. You normally may not be allowed to borrow any more money until you have successfully completed your arrangement. It may however be possible to change an existing mortgage.

In retrospect, IVA is one healthy option that can help deter the financial burdens of debts. Yet like any life changing decisions, it is best to consult professional debt advisors, or even chat to friends and family.

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