What Is an IVA and How Does It Work?

Running a small business is difficult. Especially in today’s financial landscape, it’s not uncommon for business owners to face various challenges leading to overwhelming debt. Factors such as supply chain disruptions, economic downturns, or simply mismanaged finances can all contribute to financial difficulties.

When these challenges arise, smart business owners often seek effective debt management solutions to regain control of their financial stability to avoid more severe consequences.

A solution gaining significant popularity in the UK is the Individual Voluntary Arrangement, or IVA.

An IVA is an alternative to bankruptcy and acts as a financial bridge that helps individuals navigate their way through debt. An IVA bridges the gap between overwhelming debt and financial stability for those struggling. It offers a formalised path for individuals to manage their debts while addressing the needs of both the debtor and the creditors.

In this article, we’ll go over everything you need to know about IVAs from what is an IVA, what are the criteria for it, and how does an IVA work to the benefits of setting one up for your business.

What Is an IVA?

An Individual Voluntary Arrangement (IVA) is a specialised financial arrangement available in the United Kingdom, designed to provide a structured and legally binding solution for individuals facing significant debt challenges. An IVA serves as a formal agreement between a debtor – the individual who owes the money – and their creditors – the entities or individuals to whom the debtor owes the debt.

What sets an IVA apart is its binding nature, which means that once the arrangement is agreed upon and approved, all parties involved are legally obligated to adhere to its terms. This includes the debtor, who commits to making regular payments, and the creditors, who agree to accept these payments as a partial repayment of the owed debt.

The primary objective of IVAs is to offer a balanced and negotiated approach to debt management. They’re specifically tailored to assist individuals who find themselves in financial distress, seeking an alternative to bankruptcy. By opting for an IVA, individuals can gain control over their financial situation while avoiding the more severe consequences associated with bankruptcy, such as asset seizure and long-term credit damage.

In essence, IVAs provide a lifeline for individuals facing overwhelming debt by offering a structured approach to debt repayment that’s both legally binding and supportive. This allows debtors to work towards financial stability and the eventual resolution of their debt burden, all while minimising the negative impact on their credit history and financial wellbeing.

Eligibility Criteria

Before we talk about how does an IVA work, we must know what it takes for a person to qualify for an Individual Voluntary Arrangement (IVA) in the United Kingdom. Individuals must meet certain eligibility requirements that help ensure the viability and practicality of the arrangement. While the specifics can vary, here are the general eligibility criteria typically considered:

Residency:

You must reside in England, Wales, or Northern Ireland. Businesses in Scotland, can explore a Protected Trust Deed as an alternative due to different insolvency laws.

Insolvency:

You must be insolvent. You’re unable to meet contractual payments, and your total debt should exceed your asset value post-repayment of secured loans.

Debt Value:

There is typically a minimum amount of debt required to be eligible for an IVA. Although this can vary, it’s generally considered that the total unsecured debts, which may include credit card debt, personal loans, and other unsecured borrowings, should be above a certain level to make an IVA a practical solution.

Creditor Benefit:

The IVA proposal should offer better returns to creditors compared to potential bankruptcy.

Affordability:

IVA payments must be sustainable throughout the arrangement. Being able to afford reasonable expenses and a stable income are crucial parts of the agreement. Significant life changes like unemployment may impact approval.

Honest Circumstances

Being completely honest about your circumstances is important to ensure fairness to creditors and suitability of an IVA for you.

IVAs are meant to provide a lifeline for individuals facing overwhelming debt. That allows debtors to work towards financial stability and the eventual resolution of their debt burden, all while minimising the negative impact on their credit history and financial wellbeing.

As a structured and legally binding approach to debt repayment, providing false information for an IVA is a criminal offence.

Setting Up an IVA

Now that you know what is an IVA, how do you set one up for your business? Setting up an Individual Voluntary Arrangement (IVA) involves several stages. As a business you start from seeking professional advice and finish with getting creditor approval. Every business has different circumstances and some steps may differ but here’s a general outline of the process:

Seek Professional Advice:

The first step you should take is to engage a licensed insolvency practitioner (IP) to find out how does an IVA work. Set up a meeting to fully understand what is an IVA, discuss your financial situation, debts, income, and assets, and find out if an IVA is suitable for you.

Creating the Proposal:

Once the IP has determined the suitability of your case for an IVA, you’ll work together with them to create the proposal. Detail your financial situation, debts, income, and assets and develop a repayment plan outlining how much you’ll pay to your creditors and for how long.

Review by Creditors:

Acting as the intermediary, the IP will present the finished proposal to your creditors. Your creditors will review and assess if the proposed terms are acceptable for them. Ultimately, the creditors’ acceptance or rejection of the IVA proposal hinges on their assessment of its fairness, practicality, and alignment with their expectations. Bear in mind, creditors whom you owe the most money to have the biggest say in your proposal.

Creditor Vote:

For your proposal to be accepted, you need 75% of your creditors to vote for it. A decision supported by 75% of your creditors will bind all creditors to it, even those that disagree. Your creditors can ask for changes to the proposal at the meeting.

Supervisor Appointment:

Once your IVA is given the green light, a licensed insolvency practitioner (IP) steps in as the supervisor. This means they take charge of the whole arrangement. They handle the process, making sure things go smoothly according to the plan. In simpler terms, the IP becomes your main point of contact, making sure your IVA journey is on track.

Payment Initiation:

Once your IVA proposal has successfully secured the support of your creditors, the plan transitions from concept to action. This is the phase where the carefully detailed financial arrangement becomes tangible, and your commitment to the agreed-upon terms come into play.

Ongoing Monitoring:

During the term of the IVA, the IP monitors your financial situation to ensure compliance. If there are any changes in your circumstances, they can help make adjustments with your creditors.

Completion:

Once you’ve fulfilled all the requirements of your IVA, your creditors are legally prevented from pursuing any additional claims against you. Additionally, any remaining unpaid debt is formally forgiven and written off. Rest assured, you’ll receive official documentation confirming the successful completion of your IVA, and a comprehensive report will be shared with your creditors to provide closure on the arrangement.

During the process of setting up the IVA, the IP handles negotiations with your creditors, and you are protected from creditor actions until negotiations are complete. However, if the IVA is not approved or you fail to meet payment obligations, the IVA will be cancelled and creditors can resume collection efforts.

An IVA is a lengthy and complex legal procedure. To get the best possible outcome, always consult a professional for accurate and tailored guidance to your situation.

How Does an IVA Work?

In short, you make payments according to a fixed schedule over a fixed term to your creditors through a deal mediated by an IP. But how does an IVA actually work?

The most important component of an IVA is the regular and structured payments in which the IVA is agreed upon, which aims to aid you in managing your debts effectively.

These regular payments go towards repaying your owed debts. The IP plays a crucial role in the process, overseeing the collection of payments and their subsequent distribution among the creditors as per the agreed terms.

IVAs typically have a predetermined timeframe, often spanning five to six years. During this period, if you adhere to the agreed-upon payment plan, you’ll be making steady progress towards settling your debts and becoming debt-free. At the conclusion of the term, any remaining debt included in the IVA is usually forgiven, allowing you to get a fresh and unburdened financial start.

Recognising that financial circumstances can be volatile, one of the key points of the IVA is its ability to accommodate changes in your situation. If there are significant shifts in your circumstances, such as a reduction in income or unexpected expenses, adjustments can be made to the IVA terms. This adaptability ensures that the arrangement remains sustainable and continues to reflect your current financial realities.

Benefits and Considerations

On paper, the IVA might seem like the perfect solution. But like everything else, there are always consequences to consider when you consider an IVA for your financial situation. It’s important you evaluate the advantages of an IVA to you and understand if the consequences of jumping into an IVA is something you’re ready for.

Benefits of an IVA

Firstly, what are the advantages of an IVA? An IVA comes with several advantages that can significantly impact an individual’s financial situation.

One of the key benefits is your ability to avoid bankruptcy, which can have long-lasting repercussions on credit, assets, and your reputation. An IVA also brings you the advantage by freezing interest and charges on existing debts, providing relief and preventing your debt from growing and snowballing. Additionally, the structured repayment plan inherent in an IVA offers you a clear path towards debt resolution. Best of all, this plan is tailored to your personal financial capabilities, ensuring that the repayment journey is manageable and sustainable.

Considerations Before Choosing an IVA:

While an IVA offers many benefits, if you’re contemplating this option you should also be mindful of some of the downsides that come with choosing an IVA.

One of the more notable aspects is the impact on your credit rating. While temporary, an IVA will be recorded on your credit report for a specific duration. This may affect and reduce your chances to obtain credit during that period. In some cases, it can also affect future employment.

The IVA will also appear on a publicly searchable insolvency register. Where the documentation includes details about you, the appointed insolvency practitioner, and the specifics of your IVA.

Moreover, entering into an IVA is a significant step, as it’s a legally binding agreement. Committing to an IVA should come only after a thorough evaluation of your financial circumstances, ensuring that the arrangement aligns with both immediate and long-term financial goals. While the IVA presents a viable path toward debt resolution, you must approach it with careful consideration ONLY after consultation with a qualified professional.

In summary, an Individual Voluntary Arrangement (IVA) is a legally binding agreement that assists individuals in managing overwhelming debt by providing a structured and negotiated repayment plan. Eligibility for IVAs depends on specific criteria that must be met.

You should only enter into a legally binding agreement after consulting a professional to prevent any oversight that can worsen your situation. To give your IVA the best chance of success, consult an IP to help you iron out any details and fine print so they can negotiate terms with your creditors on your behalf.

Build your path to financial stability with Irwin Insolvency. Our team of licensed insolvency practitioners is dedicated to tailoring solutions for your financial challenges. We’re not just about avoiding insolvency – we’re here to guide you towards sustainable success.

If your business is grappling with insolvency and you’re looking for turnaround strategies, get in touch with us at 0800 2545122 or send us a message to schedule your consultation.