What is an IVA? By Melanie Taylor At Isnare.com Ezine Articles

If your debt situation has become so serious that you feel you are unable to repay what you owe within a reasonable period of time, then an IVA (Individual Voluntary Arrangement) may be able to help.

An IVA is a formal agreement between you and your creditors, in which you would agree to repay a specified amount of your debt and write off the rest. It is widely considered a preferable alternative to bankruptcy, since it avoids many of the downsides associated with bankruptcy (such as losing your home, or being prohibited from working in certain professions).

How an IVA works

Before you can enter into an IVA, an Insolvency Practice will draw up your initial IVA proposal, based on a discussion about your income and expenditure. This details the proposed terms of your IVA, including how much you can afford to pay to your creditors each month once your essential costs have been covered.

This proposal will then be sent to your creditors, who will be invited to 'vote' for or against the terms. For the IVA to go ahead, creditors accounting for at least 75% of your total debt must approve the terms.

If the IVA is approved, you will then start making regular monthly payments to your Insolvency Practice, which will divide the money between your creditors on a pro rata basis (i.e. according to how much you owe to each) as agreed. This will normally continue for five years.

If you experience any increase in income while your IVA is ongoing - for example, you receive a pay rise, bonus or commission - you may be expected to give up some of this to put towards your IVA. If you are a homeowner, you may also be required to release some of the equity in your home in the 54th month (half way through the final year) of your IVA.

Once your IVA is completed, you will be considered legally debt-free: any remaining debt will be written off.

Who is an IVA best for?

As each individual has a different set of personal and financial circumstances, the answer to this will vary from case to case, but in general, an IVA is best for people who cannot realistically repay their entire debt within a reasonable timeframe, who can afford to make regular monthly payments, and who would like to avoid the downsides of bankruptcy.

However, bear in mind that bankruptcy can be a better option in some cases. For example, if you do not own your home you have less to lose from bankruptcy - and therefore less need for the protection an IVA can give. Plus, individuals are usually discharged from bankruptcy within one year, as opposed to the typical five-year term on an IVA.

If you do opt for bankruptcy, be aware of the impact on your ability to obtain credit. Bankruptcy (like an IVA) will remain on your credit history for six years - but even after that, future creditors may ask you to declare whether you have been bankrupt in the past.

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