How IVAs work - a step-by-step guide

8 June 2009

An IVA (Individual Voluntary Arrangement) is a legally binding debt solution that can help people clear unmanageable debt. If they can reach an agreement with their unsecured creditors, they will repay as much of their unsecured debt as they can afford over a fixed period (normally 5 years), and then their creditors will write off the rest, leaving them legally debt free.

A step-by-step guide

1) Contact a debt adviser
Entering an IVA is a big step, and you need to discuss your situation with a debt adviser, who can help you explore your options and help you decide if you want to go ahead with an IVA.

Please note that an IVA won`t be an option unless you owe around £15,000 or more and can`t keep up with your debt repayments - but can commit to making regular reduced payments for (in most cases) 5 years.

2) Draw up an IVA proposal
If an IVA does seem to be the best solution to your debt problems, you`ll work with an Insolvency Practitioner (IP) to draw up an IVA proposal, which tells your creditors how you intend to repay them if the IVA is approved.

3) Find out what your creditors think
Your creditors will vote on the IVA proposal. If creditors who collectively own 75% or more of your debt agree to it, your IVA can go ahead. (They may request some changes to it first.)

If your IVA is approved, your creditors are not allowed to change their minds later on. Even creditors who voted against it - or didn`t vote at all - will remain legally bound by the terms.

4) Start your IVA
You`ll begin making payments to your IVA. These payments will be the maximum you can afford once you`ve taken your essential expenditure (the money you need for mortgage/rent, utility bills, petrol, food, etc.) into account. In most cases, this will go on for 5 years.

If you`re a homeowner, you may also be required to release equity in your home in the 54th month of the IVA (6 months before the end of the IVA) so you can pay more into your IVA.

5) Complete your IVA
As long as you fulfil everything on your side of the arrangement, your IVA will come to a successful conclusion at the end of the term. Your outstanding unsecured debt will be written off and you`ll be legally debt-free.

However, your IVA will stay on your credit report for one more year, which can make it harder and/or more expensive to obtain credit.

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