How does an IVA work?
On the face of it, IVAs can appear to be a complex and complicated but, in truth and for the most part, they can be described in very simple terms. That's why the team here at 'My IVA Adviser' believe it's really important for you to understand how an IVA works, particularly if you are considering applying for an IVA in the near future.
We believe that once you're familiar with the basic principles of IVAs and how they function, you'll be in a much better position to determine for yourself whether an IVA is indeed the right debt solution for your personal circumstances.
So, how does an IVA work?
A Fresh Start
An IVA represents a fresh start for someone who's become over-indebted and can no longer maintain their financial commitments.
An IVA does this by setting out the framework for a new agreement between a person with debts over £10,000 and their creditors.
When agreement has been reached with the required majority of creditors, the IVA becomes legally binding on all creditors.
As part of the basic terms and conditions of all IVAs, the creditors are legally obliged to freeze all interest and must refrain from charging any further fines or charges.
Creditors also forfeit their right to take legal action against the IVA applicant for enforcement of the debt, thus protecting the applicant's assets from the threat of being seized under the bankruptcy process.
A licensed Insolvency Practitioner, otherwise known as an IP, is appointed to ensure all the terms and conditions of the agreement are adhered to by all parties.
The IP administers the IVA and, amongst other duties, collects and distributes the IVA payments, whilst also undertaking regular reviews of the applicant's circumstances, to keep the IVA on track.
Having an IP to act as a kind of referee gives all parties the reassurances they need to enable the IVA to proceed successfully.
The applicant receives protection from their creditors, and any legal actions they might wish to pursue, whilst creditors are assured the IVA will be administered properly, with the terms being adhered to throughout the term.
The IP is paid for the work they undertake. Creditors agree to the IP fees as part of the overall agreement, and these fees are deducted from the money being paid into the IVA.
This puts the onus of the IVA's cost onto the creditors.
IVA payments are based on affordability
All the IVA applicant's monthly debt repayments are consolidated into one new IVA repayment.
The new IVA payment is based on affordability and the new payment replaces the previous obligation demanded by creditors.
Once the level of the IVA payment has been agreed, creditors can't simply try to increase it. Instead there is an annual review during which the payment is reassessed by the IP.
The IVA payment will only be increased if it is affordable for the applicant.
Predetermined fixed time period
Once the IVA has been agreed at the Creditors' Meeting, the IVA becomes legally binding on everybody named in the agreement.
Unlike the alternative of an informal Debt Management Plan (DMP), an IVA works on a fixed time period, normally set to 5 years. Once the fixed term is reached, and assuming there have been no missed payments, the IVA is considered completed.
The IVA terminates and the applicant is released from their obligations under the IVA.
Potential debt write-off
Payments into the IVA are based on affordability and there's a fixed repayments term which is set at the outset. This means it may not be possible to repay the full debt within the time period.
Any debt which is left unpaid at the end of the IVA is, therefore, legally written off by the creditors.
So there you have it...
An IVA is a new agreement between you and your creditors, that lasts for 5 years, allows you to repay what you can afford and legally writes off any money that hasn't been repaid at the end of the agreement.
Professional IVA advice
If you would like to discuss the possibility of applying for an IVA, then call us now on 0800 088 7503, or complete this form and one of our advisers will contact you at your preferred time.