An IVA, or individual voluntary arrangement, is a legal alternative that exists in the UK for individuals who wish to avoid bankruptcy. The IVA was established under the Insolvency Act 1986-Part VIII and is also governed by this legislation. Under an IVA, a formal proposal for repayment to unsecured creditors is presented to creditors by an insolvency practitioner.
Individuals who are struggling to repay their debts use the IVA to get creditors to accept a repayment plan that the debtor can afford. To quality for an IVA, the debt must exceed £15,000, debts must be payable to two or more creditors, and the debtor must be able to pay at least £180 monthly. In addition, the individual must show that the monthly living expenses plus debts exceed the monthly income.
Usually, claims of secured creditors are not included in the agreement. After the debtor has paid for necessary living expenses and submitted what is due to priority creditors, the remainder of the money can be paid under the terms of the IVA. Once an individual has made the agreed upon payments under the IVA, the remaining debt included in this plan is written off, so the individual will not be held accountable for it.
Not everyone will find himself or herself in a financial situation that qualifies for an IVA. Debtors whose financial situation is less serious should consider a debt management plan. Those who feel they do qualify for an IVA will need to submit a proposal, which is subject to approval by the creditors. Independent agencies of insolvency practitioners help manage the IVA repayment plan by dealing directly with creditors. They collect the individual’s payments and distribute these to creditors per the written agreement.
As an alternative to bankruptcy, IVAs are attractive to people who have many assets they want to protect, such as expensive cars and high-equity properties. Under an IVA, these assets are not directly at risk as they could be in a bankruptcy situation. However, bankruptcy and the IVA are not mutually exclusive because an individual can submit an IVA proposal after filing for bankruptcy. In the case of an undischarged bankruptcy, the bankruptcy order can be annulled. In certain situations, an IVA may be approved after a bankruptcy order has been made.
Disadvantages of entering an IVA include the stigma attached to it. The information is listed on the Personal Insolvency Register in the UK and will remain on the individual’s credit file for six years. Income-based IVAs often lasts for up to five years, where bankruptcies are usually automatically discharged within one year. Payments are often much higher under income-based IVAs than bankruptcies.
One major positive aspect of an IVA is that it does not legally restrict the individual from obtaining credit. IVAs also do not prevent debtors from acting as company directors. Once an IVA proposal is approved, it applies to all unsecured creditors, even those who did not directly approve it . Debtors have more control over their homes under an IVA than a bankruptcy, making this a preferred alternative for many who find themselves in a bad financial situation.