What is an IVA?

When someone takes on debt and they can't afford to repay under the terms of their loan, they have a few options to consider. Most of us are aware of bankruptcy as a last-ditch solution to debt problems, but there is also the option to opt into an individual voluntary arrangement, or ‘IVA’.

But what is an IVA in the UK? And can you take out loans with an IVA? Below, we’ll answer the most popular questions, offering insight into whether they could be the right route for you.

What is an IVA?

An IVA is a legally binding agreement between a creditor (someone who lends money, including short-term loans, payday loans, bank loans, store cards and car finance) and a debtor (someone who owes money). They can be put in place to help a debtor settle their debt over a longer period, repaying only what they can realistically afford to pay each month until the debt is cleared, or the IVA term is over. Sometimes, the entire debt won't be covered by the IVA.

Both the debtor and the creditor need to agree to the terms of the IVA and stick to the agreement. Therefore, if you are a debtor, you need to make the agreed repayments on time for the entire term of the IVA. Usually, the creditor then won't pursue you for larger amounts or request unscheduled payments, for example.

While an IVA is a form of insolvency, it’s different from bankruptcy in several ways. However, it’s important to remember that an IVA cannot be set up for things like:

• Student loans
• Fines (such as parking tickets or speeding fines)
• Child support

Remember, rather than seeking an alternative agreement such as an IVA, it’s always preferable to repay your loans and debts on time (including credit cards and short-term loans).

How does an IVA work?

Here’s a quick look at how IVAs work in reality:

1. First, an IVA is put into place by an insolvency practitioner.
2. Once you’ve signed up for an IVA, you’re legally obliged to make repayments every month for several years.
3. The IVA repayment period is usually between five and six years, and you’ll be committed to repaying as much as you can afford to repay every month.
4. If you come into money while you’re in an IVA, some or all of this money can be taken from you to repay your creditors. An IVA is a long-term commitment and may affect your income from jobs and any windfall you receive over the years while it's active.

How do you get an IVA?

You can’t apply for or arrange an IVA yourself. You'll need to appoint an insolvency practitioner (IP) to help you agree to an individual voluntary arrangement between you and your creditors.

Insolvency practitioners either work as part of an organisation offering debt solutions, or they work as individuals. An IP will take responsibility for your IVA and try to ensure that it works for all parties involved, including the debtor.

When it comes to IVAs, an IP’s job is to get as much money back for the creditors without putting undue financial pressure on the debtor. Instead, they will take a careful look at a debtor’s financial situation and come up with a proposal that must be agreed to by all parties involved.

You can use this free government portal to find an insolvency practitioner. Just bear in mind, it’s best to avoid businesses that offer this service at a further cost.

How long does an IVA last?

IVAs usually last between five to six years, although the terms may be extended if you fail to make the payments. During this time, the individual must commit to making regular monthly repayments to clear their debt.

How are IVAs different from debt relief orders?

Debt relief orders are an option for some people who have debts lower than £30,000 and have less than £75 available each month to make repayments. You can only qualify for a debt relief order if you have no assets that could be used to help repay a debt.

Debt relief orders generally don't require you to make repayments to your creditors, and your debt is usually written off at the end of the debt relief order period. Debt relief orders can harm your credit rating and make it more difficult for you to obtain credit.

Is an IVA suitable for me?

IVAs aren't suitable for everyone, but they can offer a solution to a debt problem that can help you avoid bankruptcy and the associated long-term damage to your credit file.

IVAs are generally more suitable if:

• You owe upwards of £10,000 to more than one creditor. An IVA can help make sure your loans are paid off and give you some breathing space from creditors.
• You have spare money available to pay off your debts. If you have no spare money once your essential costs are taken into account, an IVA is probably not the best solution for you.

In most cases, you won’t be expected to repay everything you owe, just as much as you can afford as calculated by an insolvency practitioner, for around six years.

If you would like help repaying your unmanageable debt with lower monthly payments over the years, an IVA may be right for you. They can also be useful for people who struggle with contacting their creditors and might prefer all contact with creditors to be taken out of their hands and handed over to a professional insolvency practitioner.

It's very easy to get bogged down by unmanageable debt, particularly if it’s spread over several loans, store cards, credit cards and specialist lenders. Many borrowers find that they take on debt that they simply can't afford to meet each month, despite the terms they initially agreed to. With an IVA, your debt is consolidated and your money is distributed to your creditors on your behalf.

How does an IVA affect my credit score?

As with bankruptcy and other similar arrangements, an IVA can negatively affect your credit score because it shows creditors that you have struggled to repay your debts in the past.

How long does an IVA stay on your credit file?

An IVA will stay on your credit file for six years after the date it begins, even if you manage to complete your payments beforehand. Since creditors will be more hesitant to lend to you, you’re also likely to have little credit activity for six years, making it difficult to improve your credit score during this time.

It may be the case, however, that you’re eligible for bad credit loans, and so this could be a consideration if you require a short-term loan during those six years under the terms of an IVA.

One way to improve your credit score is to repay the IVA, avoiding bankruptcy and having the IVA marked as completed on your credit file.

Considering the potential risks

Before arranging an IVA, it’s important to understand the associated risks. You may have to remortgage your home or contribute your savings and personal pension payments. You may also have trouble borrowing money for proceeding years. And most importantly, if you cannot keep up with repayments, a failed IVA can also lead to bankruptcy.

Can you take out loans with an IVA?

What about IVAs and payday loans? Well, with an IVA, your ability to take out new credit will often be restricted because you’re already under a borrowing agreement to resolve your current debt. Small loans for IVA customers may be available, but you’ll need permission from your IP to borrow more than £500, and lenders will typically propose higher interest rates and stricter terms.

It’s crucial to seek permission from your IP before applying for credit of any kind to avoid breaking your IVA terms. For credit less than £500, you’ll need to inform the lender about your IVA, and for more than £500, you’ll need written permission from your IP.

While some lenders offer loans for people who have IVAs, it will all depend on your circumstances and the lender’s criteria. Equally, taking out additional loans might not be the best option if you’re currently struggling to afford your existing credit repayments.

Is an IVA better than bankruptcy?

Although IVA payment plans are longer than bankruptcy payments, there are some potential benefits to choosing an IVA. For instance:

• IVAs are more discreet than bankruptcy: While bankruptcy may be published in local newspapers, an IVA only appears publicly in the Individual Insolvency Register. Additionally, an IVA will likely not affect your career. Bankruptcy, on the other hand, may impact your eligibility in certain positions.
• IVAs may allow you to keep more of your assets than bankruptcy would: If someone has declared bankruptcy, they must release any equity over £1,000, and they may have to sell their home. Meanwhile, if you have an IVA and you have less than £5,000 in equity, you typically won’t need to take action.

IVA debt help: Alternatives and where to get advice

It’s important to seek out impartial debt advice if you’re in debt and are considering an IVA. Stepchange.org offer free, independent advice and will be able to provide some insight into whether they feel an IVA might be right for you.

If you decide that an IVA isn’t the right route, all is not lost. If you’re struggling with debt, there are options available to you that may end up being less expensive than an IVA.

These may include:

• A debt relief order
• Administration order
• Bankruptcy
• A debt consolidation loan
• A debt management plan

How Moneyboat can help

Here at Moneyboat, we’re dedicated to responsible lending. We do everything in our power to help ensure that every single one of our borrowers can afford the repayments we agree on for the entire term of their loan. However, there are all kinds of reasons that people find themselves with unmanageable unaffordable debt and, these days, there are solutions that can help you.

If you’re a Moneyboat customer and you’re concerned about making your loan repayments, contact us as soon as possible. You can also reach out to other third-party organisations for advice, such as National Debtline and Citizens Advice.

If you found these insights helpful, you can head over to the Moneyboat blog for plenty more. There you can read about debt consolidation, debt management plans and loans, as well as how to ask for breathing space with debt.