Is an IVA right for you?

You would not believe how many people call us to ask this question!

The key issue is that you need to be committed to repaying your debts as much as you are able, and in putting together an IVA Proposal, you are demonstrating to your creditors that you really want to sort out your money problems, by committing yourself to repaying at least a proportion of the outstanding debts by way of a legally binding arrangement.

For the creditors, it will give them confidence that at least a percentage of their debt will be repaid, subject to their approval. An IVA Proposal will demonstrate to them that they will receive more from these arrangements than if you were to be made bankrupt, as the Proposal has to provide a comparison of payment return between the IVA and Bankruptcy routes.

Fees in bankruptcy tend to be quite high, and IVA fees are usually a lot lower. Creditors therefore should see a better return from the IVA, and of course in voting for the Proposal, they are indicating their acceptance of these fees.

An IVA could be the best debt solution for you if:

  • You have unsecured debts of £15000 or more
  • You have 3 or more creditors
  • You are finding difficulties in making your contractual repayments to your debts
  • You have a monthly ‘disposable income’ – funds left after paying for your essential living costs – of £200 or more per month.
  • You are employed or self employed.

Advantages of an IVA:

  • You need make only one payment into the IVA each month, instead of having to pay funds to each debt, helping with budgeting. It is the responsibility of the Insolvency Practitioner to pay your creditors.
  • An IVA will generate better returns for creditors than bankruptcy.
  • Creditors can benefit from certain tax reliefs against ‘bad debts’ in respect of IVAs.
  • Creditors are legally bound by the terms of the IVA, even if some vote against it, as long as creditors amounting to 75% of the total debt vote to accept.
  • Once an IVA is approved at the Creditors’ Meeting, even those who voted against it, or those who did not vote at all, are prohibited from contacting you and making further demands.
  • Interest and charges are frozen on all the unsecured debts in the IVA.
  • Creditors can no longer contact you, or make any further efforts to recover their debt.
  • A proportion of the unsecured debts can be written off as part of the IVA agreement, giving certainty at the end of the IVA that there is no further unsecured debt to pay off. So, after completing the IVA, you will be debt free – at least as far as your unsecured debts are concerned.
  • Unlike bankruptcy, an IVA allows you to keep your assets such as your house.
  • An IVA is confidential, between you and your creditors. It will not appear in your local newspaper, though is recorded on the Register of IVAs which is available for public inspection subject to request. To all intents and purposes, an IVA is private, so even your friends and family need not be aware of it. Many continue to feel there is a ‘social stigma’ to bankruptcy, and this is avoided through an IVA.
  • An IVA can mean you avoid the threat of bankruptcy.
  • Individuals in an IVA can continue to hold a bank current account, which can be very difficult to obtain in bankruptcy. Of course, you will be required to operate the account in credit only, and there will not be any overdraft availability. Keep in mind however that, where you have a debt to your bank in the IVA, you will need to open another account at an alternative bank where you have no debt, so that you can arrange for your salary to be paid in etc.
  • An IVA protects your home from the clutches of the creditors, safeguarding the roof over your head.
  • With an IVA, you repay only what you can afford, and the rest is written off.
  • Over time, an IVA will help to repair the debtor’s credit rating by demonstrating the ability to make monthly payments, and the determination to resolve their money problems.
  • A self employed business owner can continue to trade throughout the IVA term.
  • You can continue to hold a position of company director – in bankruptcy, you cannot so.
  • There are no disqualifications from professional or trade bodies as a result of an IVA.
  • An IVA allows people to continue work in the Financial Services sector, the Armed Forces, Police Service and HM Prison Service, where bankruptcy is prohibited.

Disadvantages of an IVA:

  • You will need to keep rigidly to the monthly payments required by the IVA, meaning that for 60 months, you will have to stick to a budget and manage your finances closely. The team at National Money can help with guidance and tips on this.
  • An IVA is legally binding on you and the creditors.
  • An IVA payment term is longer than in bankruptcy; an IVA lasts 5 years on average, whilst bankruptcy lasts generally for only 1 year. However, bankruptcy may require you to continue payments for up to 3 years.
  • All unsecured debts must be included in the IVA.
  • If you are a homeowner, the terms of an IVA may require you to re mortgage your house to release some of the equity (value) into the IVA. Normally any such requirement will occur within the fourth year of the IVA, though it is recognised by creditors that in the current economic climate, re mortgages are not easily obtained. If you cannot obtain a re mortgage, you may be required to pay into the IVA for up to a further 12 months.
  • To succeed with creditors, an IVA needs to have the agreement of creditors who vote, and who account for minimum of 75% in value of total debts.
  • The IVA is recorded on a publicly accessible register.
  • An increase in pay or improvement in financial circumstances could result in a requirement to pay more into the IVA.
  • Whilst in an IVA, no further unsecured borrowing can be obtained.
  • You may be made bankrupt if you fail to keep up with your payments into the IVA.
  • An IVA will show on your credit file for 6 years.

OK, an IVA seems the right route – where do I start?

First, let’s look at the criteria you’ll need to satisfy to qualify for an IVA:

  • You must be a UK resident – England, Wales or Northern Ireland, but NOT Scotland. If you live in Scotland, the law is slightly different and an IVA is not available. However, don’t despair as the alternative but similar in impact is called a Protected Trust Deed which we can discuss and provide you with advice.
  • You must have debts based in the UK, in pounds sterling (£).
  • You must be ‘insolvent’. This is a technical term used where you are unable to meet your contractual payments on your Consumer Credit Agreements, or your debts are greater than your assets – typically the equity in your house.
  • You will need to demonstrate a determination to repay your debts to the extent of your capabilities; an IVA is not for those who have no particular interest or commitment to dealing with their debts.
  • You should have a regular income and show that you can cover all of your basic (essential) living costs – e.g. food, clothing, rent/mortgage and utility bills.
  • You need to have unsecured debts in excess of £15000, and you need to show that you can afford at least £200 per month towards these debts. Where debt levels are lower than this threshold, it may be that a Debt Management Plan is a better option.
  • The key consideration about the viability of an IVA is the return creditors will see from the IVA, which is generated by the level of contributions against the debt level. Generally, creditors will want to see a minimum return (dividend) of 25% of their debts back to them if they are to support an IVA Proposal. However, some creditors will insist upon a higher return. You may see a number of websites professing to ‘write off up to 75% of your debts’, but be wary of such claims; arrangements will be determined by your own situation which can only be established after taking proper advice, and frankly debt written off at this sort of level is rare.

OK, I’m clear about the criteria, but how do I arrange an IVA?

You must discuss your situation fully with experts who can consider the right way forward. At National Money we have the expertise and experience to help you make the right decision and set you on the right path.

An IVA must be arranged through a licensed Insolvency Practitioner and we can deal with the whole arrangements for you.

How do you calculate the monthly payment I need to make in an IVA?

  • There is no set figure to pay to an IVA. Everyone’s situation is different, and that is why you need to discuss your situation fully with us.
  • The monthly contribution you will need to make into your IVA will be determined by what you can reasonably afford. This is worked out by taking into account your average net monthly income, including benefits such as Working Family Tax Credit etc, and deducting from this figure the costs of maintaining your home and family – items such as mortgage/secured loan payments, rent, Council Tax, food, clothing and utility costs (electric/gas/coal/telephone). At this point we do not take into account the amount you are, or should be, paying to your unsecured debts (credit cards etc) as these will be included in your IVA.
  • By calculating the amount left after covering your living costs (otherwise known as ‘disposable income’), we can ensure that the payment to the IVA should never be more than you can reasonably afford.
  • There have been many examples in the past of IVAs being set up where the monthly contributions have been set too high, and this has proved to be unrealistic despite a debtor’s initial commitment to make these payments, as all that happens is that over a period of time, the IVA will fail.
  • The whole point of an IVA is to give debtors who cannot afford to repay their debts another chance in life. An IVA is set up where people are struggling to deal with their debts, so there is no sense in entering into an IVA at a payment level that ensures you continue to struggle!

What should I take into account to calculate what the IVA payment should be?

Don’t forget, the key issue here is to calculate a payment figure which is affordable – not just now, but for the next few years! So, the monthly payment for the IVA has to be right for you (the debtor and client), the Insolvency Practitioner and the creditors, who need to agree that the payments give them an acceptable return on the IVA.

The starting point has to be a review of your ‘Disposable Income’. In reaching this figure, we need to list ALL of your monthly income; this may be simply your monthly/weekly salary after tax, but we also need to look at the following to see if they need to come into the equation:

  • Wages/Salary
  • Overtime
  • Bonuses
  • Income from Jobseeker’s Allowance (JSA)
  • Income Support
  • Working Tax Credits
  • Income from Pensions
  • Pensions Credits
  • Disability Living Allowance (DLA)
  • Incapacity Benefit
  • Statutory Sick Pay (SSP)
  • Child Tax Credit
  • Child Support (CSA) or Maintenance
  • Housing Benefit (if rent etc not netted)
  • Income from family members/lodgers/boarders
  • Attendance Allowance
  • Carers Allowance
  • Anything else!!!

What if I am self employed?

Where individuals are self employed, we need to look at the income drawn from the business which is not as simple as you might first think. In effect this sort of business is often simply an extension of the individual and the level of income taken from the business will vary according to the ability of the business to pay it. Consequently, it is important to look at the business’ trading accounts and agree a reasonable income figure.

At National Money we have a number of clients who are self employed, and we recognise the issues involved with these individuals in reaching the right level of monthly payment into the IVA, as income can vary from one month to the next.

We also need to factor into the calculation the way in which self employed people have to pay their tax which is rarely like most of us who deal with this through Pay As You Earn (PAYE). Many self employed people will have problems with their tax liabilities and we need to ensure these are handled within the IVA also.

What about company directors?

Similarly we have a number of clients who are company directors and these individuals have their own special circumstances to consider when looking at the viability of an IVA. An IVA is an important solution for company directors, because the alternative of bankruptcy will cause them to be disqualified from such a role, leaving them without a job.

Many directors have complex arrangements for their income, much of which can be dependent on the performance of the business, and their contribution to the business results against pre agreed performance criteria. Their overall annual income can be significantly affected by the size of their annual bonus or dividend.

In circumstances such as these, more complex calculations of IVA payments are called for, and need to factor in also the tax issues arising from these more complicated income arrangements.

What if my work is affected by the seasons – e.g. farming?

This calls for a special understanding of your circumstances, which we are fully used to doing at National Money. There is no sense in setting up an IVA which calls for regular monthly payments throughout the year, when the bulk of your income is earned during a particular part of the year – e.g. harvest time. You will end up with a very lean time for income whilst having the continued burden of ongoing monthly payments which are unrealistic.