What are Individual Voluntary Arrangements?
Sometimes, the amount of debt has gotten too high to reach a less formal arrangement with your creditors, and if that is your situation you may need to seek a different kind of solution to cut bad debts. We will call that the IVA solution.
You have done your best to balance the books, but however much you try your debts keep on mounting. Hopefully by this stage you have stopped using your credit cards, even cutting them up to avoid any temptation to use them. Credit cards and store cards are among the most expensive form of borrowing. the irony is that whilst Bank of England interest are low the credit card companies’ rates remain very high, as much as 19% APR in some cases.
Debts Written Off
More people are now taking out what are known as an IVA – an Individual Voluntary Arrangement. Individual Voluntary Arrangements are a formal arrangement between debtors and their creditors. A legally binding agreement is made whereby you will pay back a percentage of your outstanding debts. The repayments are based mainly on what you can reasonably afford to pay, usually over a five year period. After the last payment has been made you are no longer in debt, as any remaining monies are written off. Individual Voluntary Arrangements are only available in certain circumstances, as, for example, there has to be a minimum level of debt before you can proceed with one, currently £15,000. And, before you enter into an Individual Voluntary Arrangement the option of bankruptcy will be discussed with you, so that you can be sure you are taking the best course of action that is right for yourself.
Individual Voluntary Arrangements are not something you can do on your own, you need the services of a licensed professional called an Insolvency Practitioner (IP). Prior to this it is likely a debt advisor will discuss your situation with you, and then if both sides are happy it is taken up by the IP. The advantages of going the IVA route are several fold. Your debts are settled within a reasonable period of time. And, any interest and debt charges are frozen. Legally, creditors will not be allowed to demand additional payments. For some, this is the best way to cut bad debts, though there are some downsides to consider. A record is made on your credit reference file while your IVA is in force. Your details are put on a register for anyone to examine if they wish. And, in some jobs you could lose your employment by having an IVA.
In the intervening period between you contacting a company dealing with IVA’s, providing your financial details to them etc, and the time of the creditors’ meeting, you can guarantee you will be contacted by some or probably all of your creditors. The likelihood is that they will ask you for a payment as a “sign of good faith.” Some creditors will just accept what you tell them after you provide them with the name and address of the company dealing with your IVA and leave you in peace. Some creditors though will try scare tactics, telling you that their company are unlikely to accept an IVA in your particular case. Basically, the person calling you has a job to do, and some use unethical means to get you to pay. The advice normally given out by those dealing with IVA’s is not to pay your creditors anything. Let us face it, if you can afford to pay all your creditors the monthly payment that is due them, then why are you seeking an IVA in the first place? It does not really make any sense. So, tell them, politely but firmly, that your case is now in the hands of an insolvency practitioner, and all future communication should be through them. You will have to provide your IP with a list of creditors, and an Income and Expenditure sheet so that your disposable income may be worked out. Forward your credit card statements on to them as they come in, that way they will always have the current figures of outstanding debt.
Eventually, often 6 weeks or more (it can sometimes take several months), after you started the ball rolling, a creditors meeting is held. This is where your creditors will discuss your proposal. Much of the time creditors do not attend the meeting in person, but will offer their acceptance of the proposal in writing. For the proposal to become legally binding on all the creditors, 75% of the value of the creditors who have responded to the proposal either in writing or person must accept. If there are any amendments any creditor wants to put forward before accepting he can do so at that time, and your IP can phone you and ask for your agreement to the revised terms. Once your proposal is accepted, it becomes legally binding, and you will receive paperwork to sign and return to show your agreeing to the terms of the IVA.
Although Individual Voluntary Arrangements will normally last 5 years, there are certain conditions upon which you must notify your IP – who usually becomes your supervisor. These include such as a windfall of money and other situations which might mean some of that money has to be handed over to him to share out between your creditors. You will also usually be asked to complete a fresh Income and Expenditure sheet every 12 months to assess your current financial situation.
What Happens If Your Circumstances Change?
None of us can predict the future. Jobs are nowhere near as secure as they have been in the past. Naturally the question is often asked “What happens if I lose my job, or my income goes down?”
When you enter the IVA agreement you commit yourself to paying x amount over so many years, usually 5. You can not, therefore, simply decide you can no longer pay those instalments, and expect your creditors to have to go along with it.
What you need to do is to contact your supervisor looking after your account, and inform him of your new financial circumstances. There may already be an arrangement in place which allows you to reduce your payments by a maximum amount, say up to 15% of the monthly figure. If not, or you wish to reduce your payments more than the 15%, then another meeting of your creditors will need to be convened by your supervisor. Hopefully a new arrangement can be put in place at the reduced level of payments, though expect the period of time to increase to help cover the shortfall, maybe by another 12 months.
There is a useful IVA discussion forum for anyone either already in an Individual Voluntary Arrangement, or is contemplating one, which provides some really good advice.
The key thing here is not to just stop or reduce your payments, assuming it will be alright. A new agreement has to be drawn up after approval by your creditors
For some debtors Individual Voluntary Arrangements can be a very effective way to cut bad debts.
