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Individual Voluntary Arrangement

Updated on January 5, 2024
Article byGayatri Ailani
Edited byShreeya Jain
Reviewed byDheeraj Vaidya, CFA, FRM

What Is An Individual Voluntary Arrangement (IVA)?

An Individual Voluntary Arrangement (IVA) is a legally binding agreement between borrowers and creditors to recoup their debts over a set period. An IVA aims to help individuals regain control of their finances and repay their debts in a manageable and structured way without bankruptcy.

Individual Voluntary Arrangement

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An Individual Voluntary Arrangement (IVA) is a debt resolution form. Which, helps individuals struggling with debt to repay their creditors in a structured and manageable way. Hence, by completing this arrangement, individuals can often avoid the negative impact of bankruptcy on their credit score and reputation. A licensed insolvency practitioner supervises an Individual Voluntary Arrangement (IVA) and acts as a mediator between the debtor and the creditor.

Key Takeaways

  • An Individual Voluntary Arrangement (IVA) is a legally binding agreement between an individual borrower and their creditors to pay off their financial obligations over a certain period.
  • Both parties, the borrower and creditor, agree on the terms and conditions of an Individual Voluntary Arrangement (IVA). Hence, this agreement requires the borrower to make regular payments towards their debt until it is fully repaid.
  • The purpose of Individual Voluntary Arrangement (IVA) is to provide a solution for individuals facing debt difficulties and seeking to repay their debts in an organized and manageable manner without the need to file for bankruptcy.

Individual Voluntary Arrangement Explained

An Individual Voluntary Arrangement definition is a type of debt solution between individuals struggling with debt to make manageable and affordable payments to their creditors. The length of this arrangement ranges from three to five years. Furthermore, accounting of individual voluntary arrangements requires a detailed understanding of the person’s financial situation and careful management of funds to ensure that the payment plan is successful.

Depending on the individual’s circumstances and the management of the arrangement, the consequences of an Individual Voluntary Arrangement (IVA) can vary.

Therefore, this process typically involves the following steps:

  • Seeking professional advice: Before entering into an IVA, it is advisable to seek advice from a debt advisor or an insolvency practitioner. Ensuring whether an IVA is the right debt solution.
  • Proposal preparation: An insolvency practitioner will prepare a proposal for the IVA, which will outline the terms and conditions of the arrangement, including the repayment amount, duration of the agreement, and creditor payments.
  • Creditor approval: The proposal is then presented to the creditors for approval. To be approved, the IVA must be approved by 75% or more of the creditors by the value of the debt.
  • IVA start: Once creditors have approved the IVA, the insolvency practitioner will act as the supervisor of the IVA and will oversee the payments to creditors.
  • Repayment: The person will make monthly payments to the insolvency practitioner, who will then distribute the costs to the creditors.
  • IVA completion: Once all the payments have been made and all the terms of the IVA have been met, the IVA is considered complete, and any remaining debt is written off.

Additionally, there are fees associated with setting up and managing these arrangements. Hence, the individual voluntary arrangement fees cover the cost of the insolvency practitioner’s services.

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Eligibility

To be eligible for an Individual Voluntary Agreement (IVA), one must meet the following criteria:

  • Unsecured debt: You must have unsecured debts to be eligible for an IVA. Therefore, this includes obligations such as credit cards, personal loans, and overdrafts, but not secured loans such as mortgages.
  • Regular income: An individual must have a stable source of income to support the IVA repayments. So, this can come from employment, benefits, pensions, or any other regular source of income.
  • Financial viability: Debts must be financially viable to repay through an IVA, meaning that an individual must have enough disposable income to meet the agreed repayments over the term of the IVA.

Examples

Let us look at a few individual voluntary agreement examples to understand the concept better:

Example #1

Let’s assume John is a 35-year-old man who has accumulated significant debt due to overspending on credit cards and taking out personal loans. His debt has become overwhelming, and he struggles to make the minimum monthly payments. Hence, he is worried about the impact of his debt on his financial future and is considering his options.

One day, John speaks with a financial advisor who suggests an IVA might be the best solution for his debt problems. Therefore, John agrees and begins negotiating an IVA with his creditors.

Under the terms of the IVA, John agrees to repay a portion of his debt over five years. In addition, he will make a single, affordable monthly payment covering all his creditors. Besides, his creditors agree to freeze any interest and charges on his debt and to stop any further legal action against him.

John makes his first payment under the IVA and gets his financial situation back on track. He also improves his spending habits and avoids falling into debt again.

At the end of the five-year term of the IVA, any remaining debt is written off, and John is debt-free. He is grateful for the help he received and is relieved that he could resolve his debt problems without declaring bankruptcy.

Example #2

Suppose Sarah is a 25-year-old teacher who has accumulated significant debt through credit cards and personal loans. She has been struggling to make the minimum payments, and her debt has become overwhelming. Hence, she worries about her debt’s impact on her credit score and financial future.

Sarah meets with a financial advisor who suggests an IVA might be the best solution for her debt problems. Therefore, Sarah agrees and begins negotiating an IVA with her creditors.

Under the terms of the IVA, Sarah agrees to repay a portion of her debt over five years. She will make a single, affordable monthly payment covering all her creditors. In exchange, her creditors agree to freeze any interest and charges on her debt and to stop any further legal action against her.

Furthermore, Sarah begins making her IVA payments and is relieved she has a manageable plan to repay her debt. She also takes steps to improve her spending habits and avoid falling into debt again.

Advantages And Disadvantages

Here are the main advantages and disadvantages of IVA:

Advantages

  • Repayment terms: An IVA allows individuals to repay a portion of their debt over a set period, usually five years. Hence, this can help make the debt more manageable and enable individuals to regain control of their finances.
  • Interest and charges are frozen: Creditors must freeze any interest and charges on debt as soon as an IVA is approved. Besides, this can help prevent the debt from growing even more significantly.
  • Protection from legal action: An IVA protects from further legal action by creditors, which can help to prevent property seizures or other legal remedies.

Disadvantages

  • Credit score impact: An IVA will appear on the credit report for six years, which can negatively impact credit score and make it more difficult to obtain credit in the future.
  • Assets may be sold: In some cases, an IVA may require a person to sell assets such as a property or vehicle to repay the debt.
  • Strict repayment terms: IVAs have stringent repayment terms, and if someone fails to make monthly payments, the agreement can be canceled, and the person may be subjected to legal action by creditors.

Frequently Asked Questions (FAQs)

1. Does individual voluntary arrangement affect credit rating?

Yes, it negatively impacts an individual’s credit rating. Once entered into this arrangement, it is recorded on the credit file and can stay there for up to six years, though the IVA is completed. Therefore, it will be visible to potential lenders, and it may make it difficult for an individual to obtain credit in the future.

2. Can you open a bank account with an individual voluntary agreement?

Banks must conduct credit checks and consider an individual’s financial situation when deciding whether to open an account. Some banks may see an IVA on the credit report as a red flag, indicating that they have a debt history. Therefore, this can make opening a new bank account more difficult.

3. Can I legally cancel my individual voluntary agreement?

Sometimes, you can legally cancel your Individual Voluntary Agreement (IVA). However, the process for doing so and the consequences of withdrawing the IVA can vary depending on the specific terms of the agreement and your circumstances.

This article has been a guide to what is Individual Voluntary Arrangement. Here, we explain its advantages, disadvantages, eligibility, and examples. You may also find some useful articles here –

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