IVA Advice

THOUSANDS of people are taking out an Individual Voluntary Arrangement to clear their debts. But what are they and how do they work?

IVAs were established in the mid-eighties as a vehicle for sole-trader businesses that had ran into financial trouble to cut their debts but wanted to avoid applying for bankruptcy. They are essentially a legal contract between lenders and a borrower to make an agreed monthly repayment. Over the past 20 years they have become increasingly used by consumers as a way of easing their debt burden. According to accountants PricewaterhouseCoopers, an IVA application is made every seven minutes.

For an IVA to come into force, 75% of the creditors have to agree to the proposal put forward by the individual's IVA practitioner. The IVA company will look at a person's income and outgoings and calculate how much they can realistically pay each month. The IVA company will typically propose that the debtor pays back between 30p and 50p in the £1 and if the creditors agree, the IVA contract will last for five years. Interest will be frozen while the debt is being repaid and after the contract has ended, the individual will be debt free. During the contract the individual will not be able to apply for any credit. Before the IVA proposal is put to the creditors, the individual needs to sign a 'statement of truth' about the financial circumstances, which needs to be read by a solicitor. A creditor meeting then considers the proposal.

In most instances, a good debt management plan will be sufficient to help a person tackle their financial problems. Most IVA companies claim that only around 3% of people that phone its call centres are recommended to proceed with an IVA. However, if you have a regular source of income and are more than £20,000 in debt then they will consider your case. It's a misconception that only poor people apply for IVAs. In fact, a typical IVA client will be a young professional in a good job that has simply borrowed too much money. Clients will usually own their own home.

It depends on the frequency of the missed payments. If you have one missed payment due to exceptional circumstances then the creditors may accept it as a one-off and proceed as usual. However, if the individual stops paying altogether, then they have broken their contract and the creditors can force them into bankruptcy. However, this can cost them up to £1,500, so often they will sell the debt on to a debt collection agency and the individual will be in a worse position than when they started.

One of the key benefits of taking out an IVA over bankruptcy is that the individual's is safe from repossession. However, if you have a large amount of equity in your property, the creditor may still expect a certain amount to be remortgaged to help meet the debt. It is likely that they will only concentrate on your unsecured debts.

If your financial circumstances change, such as you inherit a large sum of money, then you will be expected to keep creditors updated and the may wish to make a change to the agreement to reflect the different circumstances. Likewise, if you lose your job, the agreement can be reviewed.

The number of IVAs could rise still faster under plans to introduce Simple IVAs - or SIVAs – by the end of 2007. At present, debtors must get agreement from 75% of their lenders to enter an IVA. An SIVA will reduce that to 50%, but only if debts total less than £75,000. A standard application process and contract will also be introduced to speed up the time it takes to complete an IVA. However, it is believed plans to introduce another tier of IVA, which would have allowed anyone with debts below £25,000 to be automatically approved, have been rejected.

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