What is an IVA?
An IVA is a legal contract between you and your creditor(s) - the organisation(s) you owe money to. If you’re struggling to repay the money you owe, an IVA will prevent your creditors from taking further action against you. They will also be required to stop charging interest on your outstanding balance(s).
When you enter into an IVA, both you and your creditor(s) will agree on a repayment schedule which you must stick to.
An insolvency practitioner (IP) will usually draft up an appropriate payment schedule, taking your financial circumstances into consideration based on the information you’ve provided. If you’re happy with the proposal, it will be presented to your creditor(s), local county court, and Insolvency Service for consideration.
IVAs are available in England, Wales, and Northern Ireland.
Things to think about before entering into an IVA
You should seek debt advice before you decide whether an IVA is the right option for you.
- You will need to pay for the IVA to be set up and managed by an insolvency practitioner (IP). On average, this costs around £5,000. In most cases, the set-up costs will be included in your IVA payments.
- Certain types of debt, such as a student loan(s) and child support arrears, cannot be included in an IVA.
- While in an IVA, you’ll need to stick to a strict budget. Any savings you have, or bonuses and additional money you receive, will usually be expected to be put towards repaying your debt.
- An IVA will remain on your credit file for 6 years after the date of agreement and will have a negative impact on your credit score. This could affect your chance of being approved to borrow credit if you need to in the future.
- Can I get credit with an IVA? You should think very carefully before you apply to borrow while in an IVA. If you need to apply to borrow over £500 with an ongoing IVA in place, you will need to obtain permission from the IP managing your case. You will also need to get permission if you plan to borrow more than £500 from family or friends.
- If you are approved to borrow credit with an IVA on your file, be aware that you may be offered a higher rate of interest. There’s also a chance that you might not be able to borrow as much money as you need.
- If you live in England or Wales, your IVA will be added to the Individual Insolvency Register (IIR). If you live in Northern Ireland, it will be recorded on the Register of IVAs.
- Not everyone will be eligible for an IVA. You could get an IVA if you are in debt; live in England, Wales, or Northern Ireland; are over the age of 18, and have monthly disposable income. You must also be able to prove to your creditors that you do not have enough money to make your current monthly repayments and you do not have more money than the value of your assets.
How does an IVA work?
If you’ve sought debt advice, done extensive research, looked into alternative options, and concluded that an IVA is suitable for you, there are various steps that you will need to take.
1. You cannot arrange an IVA yourself and must seek assistance from a professional insolvency practitioner. You can find a list of authorised IPs on the Gov.uk website.
2. Some IPs may offer a free initial consultation. You could obtain several quotes from different IPs to allow you to compare prices.
3. Once you’ve chosen your IP, they may request a meeting with you, either over the phone or in person at their office. This will be to ensure that you understand the process and to make you aware of any other options available to you.
4. Should you choose to proceed with the IVA, you’ll discuss a plan of action with your IP. It’s important to be honest about your situation or you could end up with an IVA that is unaffordable for you. Withholding or providing false information from your IP is a criminal offence and could result in a fine or prison sentence.
5. You will be asked to provide the IP with information such as details of your debt(s) and the creditor(s) you owe. The IP might also require some further documents, including proof of income and outgoings. This will enable them to help you set up the IVA and a suitable repayment plan based on your financial situation.
6. The repayment plan you and your IP agree on will be shared with your creditor(s) and your local county court. The creditors will then decide whether to accept the IVA.
7. If the IVA is accepted and confirmed by the court, you will be expected to make direct payments to your IP, who will take their fees and use the leftover sum to repay the creditors. You can choose to make monthly repayments or one lump sum.
What happens if I’m struggling to make my IVA payments?
Missing an IVA payment could have serious consequences.
If your circumstances change during the course of your IVA, or you find that you’re struggling to make the payments, you should contact your IP as soon as you can. There may be things they can do to help ease the pressure.
If you miss a payment without letting your IP know, they may send you a ‘notice of breach.’ The notice of breach should give you opportunity to explain your circumstances and amend what went wrong, such as making a late payment as soon as possible.
You’ll usually have a certain amount of time to acknowledge the breach and work out a solution with your IP.
Ignoring the breach could result in the IP ending your IVA or even making you bankrupt.
Will an IVA affect my employment?
This will depend on your employer and the industry you work in. If you’re unsure, you should check your employment contract or seek advice from your HR department.
It’s worth noting that when applying for certain jobs, such as those in the financial or law sectors, you may be required to undergo a credit check as part of the recruitment procedure. Having an IVA on your file could have a negative effect on your application.
How can I improve my credit score after an IVA?
While having an IVA on your credit file will result in a decline to your credit score, the good news is that poor credit doesn’t have to be for life. There are several ways to rebuild your score and work towards a healthier credit position.
- Pay your bills on time. Late or missed payments will harm your credit score.
- Register to vote. Being on the electoral roll will provide potential lenders with proof of your identity and current address.
- Check your credit report for errors and report any incorrect information to the credit reference agency.
- If you have a credit card, be sure to stay well within your credit limit. Avoid using your credit card to withdraw money from cash machines. This is known as a ‘cash advance’ and could be viewed as poor money management.
- Keep your credit applications to a minimum. When you apply for credit directly with a provider or lender, they will carry out a hard search. A hard search will remain on your credit file for up to 12 months and multiple hard searches over a short period of time could have a negative effect on your credit score.
I’m worried about money; what can I do?
While it might be the very last thing you feel like doing, please know that reaching out and asking for help is the first step towards taking back control of your finances.
Whatever you’re facing, it’s important to remember that you’re not alone, and help is available. There are several charities and organisations that offer free, confidential, impartial money and debt management advice, including StepChange, MoneyHelper, Citizens Advice, and National Debtline.
The information contained in this article is meant as a general guide and does not constitute nor should be taken as financial advice.
October 2024.