What is an IVA
An IVA is a formal debt solution which was introduced as part of the Insolvency Act of 1986 and is designed to give seriously indebted individuals the opportunity to become debt free whilst avoiding bankruptcy.
It provides a realistic alternative to those people whose occupations prohibit the bankruptcy route, or those people whose assets would be vulnerable if their creditors petitioned bankruptcy proceedings against them.
The IVA itself is a structured repayment plan based on a fixed term (normally 5 years) during which the applicant makes contributions based on affordability.
An IVA allows the IVA applicant to outline the structure of the agreement in a document called an IVA proposal. The IVA proposal describes to all the applicant's creditors exactly what their personal circumstances are, how much they owe and what assets they have. It also contains a breakdown of the applicant's income and expenditure, detailing exactly what they are able to afford towards their IVA contributions.
The creditors have an opportunity to assess the IVA proposal placed before them and they are then invited to vote on whether they accept being legally bound by it. If a sufficient majority are prepared to accept the offer (i.e. more than 75% in debt value terms), the IVA become legally binding on all the creditors, whether they voted in favour or not.
Once agreed, the creditors are legally obliged to freeze the interest charges on the debts, cease taking any legal action for the recovery of the outstanding debt and refrain from adding any late payment charges to the outstanding balance.
The IVA will then continue for the agreed duration, after which time the IVA is said to have completed successfully. At this point, under the terms of the IVA's terms and conditions, any debt left unpaid by the IVA's contributions is considered settled and is legally written-off.
This offers the IVA applicant a significant benefit, for they have the possibility to write-off upto 75% of their original debt, once the costs for the IVA have been deducted from their contributions, though levels of 60% - 70% write-off are more common.
As part of the terms and conditions of the IVA, any assets owned by the iVA applicant are protected from creditors taking action to have them being forcibly sold to repay the outstanding debt. Instead, the IVA proposal lays out the pre-arranged structure under which the applicant's assets will be taken into account.
In the case of property with equity, there are 2 choice available to generate a return to creditors. The applicant will be required to either remortgage their property towards the end of the IVA's term, to release whatever equity they can or they will be required to extend their IVA for a further 12 months, with the extra payments being taken in lieu of any equity that might be in the property which can't be released.
Once the IVA term has been completed and the IVA has been brought to a successful conclusion, the IVA applicant is completely free of debt and able to begin the process of rebuilding their credit rating.