How the IVA process works

People who are struggling with an unmanageable level of unsecured debt may be interested in finding out about the debt solutions that could help them clear their debts and regain control of their finances.

One of the solutions that may be appropriate is an IVA (Individual Voluntary Arrangement), a form of insolvency that could let them repay as much of their debt as they can afford (in most cases, over a 5-year period), after which their lenders would write off the rest of their unsecured debt.

How does the IVA process work?
Before anyone can enter an IVA, they'll need to talk to an Insolvency Practitioner (IP), an expert who can explain the pros and cons of an IVA and tell them whether it would be the most appropriate solution to their debt problems.

If the IP thinks it is - and if the borrower agrees and decides to go ahead with it - they'll work together to draw up an IVA proposal, which will tell the lenders how the individual and the IP believe the IVA could work. So it would detail how much the lender would be able to pay into the IVA, how they'd pay it, and so on.

The lenders will then have at least 14 days to look over the terms and decide if they think it's a realistic proposal that they can agree to. If lenders who collectively own 75% of the debt agree to the terms, the IVA can go ahead. (They may want to suggest changes to the terms first, and the individual and their IP will need to make themselves available so they can discuss this.)

If the IVA does go ahead, interest on the debts will be frozen when it starts, and the individual will start making the agreed payments. As long as the borrower sticks to their side of the agreement, their lenders will not be able to change their minds or take any action against the individual - including trying to make them bankrupt.

If all goes well and the individual is able to make all the payments throughout the IVA, it will come to a successful conclusion. The lenders will write off all outstanding unsecured debt and the individual will be legally debt-free, as far as their unsecured debts are concerned - this won't affect their mortgage and any other secured debts which they have.

Are there any drawbacks to an IVA?
An IVA offers borrowers significant benefits - such as the debt write-off and the fact that lenders can't take any action against them while the IVA is in progress - but there are also 'downsides'. The most significant are probably the following:

First of all, it's a serious commitment, and if the individual can't realistically expect to make payments throughout the IVA, it won't be appropriate for them.

Secondly, an IVA will have a serious effect on the individual's credit rating for six years from the time the IVA starts. In most cases, this means it'll be there for one year after the IVA finishes.

Third, a homeowner in an IVA will probably be required to release equity from their property in the 54th month of the IVA (six months before it finishes).