An Individual Voluntary Arrangement, which generally is shortened to IVA, is a way for people or businesses (in which case it is called a Company Volountary Arrangement) with otherwise irresolvable debt to deal with that part of their indebtedness which is in the form of unsecured loans. Typically these are credit and store card debts, personal loans and bank overdrafts. Secured debts such as mortgages and hire purchase contracts are excluded from IVAs with the exception that, in certain circumstances, some types of hire purchase agreements may be included.

IVAs were included in the Insolvency Act of 1986 as an alternative form of insolvency to bankruptcy. In Scotland the law is a little different and a very similar arrangement is called a Protected Trust Deed (PTD). The principal difference between a PTD and an IVA is that usually a PTD lasts for three years whilst an IVA lasts for five years.

There are significant advantages of an IVA over bankruptcy. Possibly the most important one is that an individual entering into an IVA is unlikely to lose their principal home. Although any equity remaining in the home at the end of the term of the IVA is likely to be used to further reduce residual debts, the home itself will not be seized. With bankruptcy it is highly likely that the bankrupt’s home will be seized and sold by the official receiver and the proceeds distributed to the various creditors.

Also with an IVA there is no future restriction on the individual becoming a company director or starting a business, whilst it is illegal for an undischarged bankrupt  to do so.

In terms of credit rating, although both bankruptcy and an IVA will impinge seriously on the debtor’s credit rating, it is likely that an IVA will be viewed by the ratings agencies as a little less negative due to the fact that an IVA implies a strong commitment to repay at least a proportion of debts, however in both cases the facts of the insolvency will remain on the debtor’s credit rating for six years.

It is only possible to implement IVA through a licensed insolvency practitioner.

Here, we will take a brief look at some of the ways an IVA could benefit you, and what some of the drawbacks might be:

Pros

• When you enter an IVA, all interest on your unsecured debts will be frozen. And because an IVA is a legally binding debt solution, your creditors can’t make changes to the terms of the agreement once it is underway.

• If, while you are in an IVA, your circumstances were to change – and it affected your ability to make your monthly payments – you and your Insolvency Practitioner (IP) might be able to arrange an ‘IVA variation’. This would basically involve a change in the way your IVA runs. And like your original IVA proposal, it would have to be accepted by voting creditors who own at least 75% of your total debt.

Cons

• In most cases, an IVA will last for a total of five years, and it will stay on your credit report for one year after completion. This can make obtaining further credit during this time harder and/or more expensive. If you decided to enter bankruptcy, on the other hand, you could be discharged after 12 months (although your credit rating would still be damaged).

• If you are a homeowner, you may be expected to release some of the equity in your property half way through the final year of the agreement. This money will be used to repay more of your debt.

Debt Consolidation

Debt consolidation often refers to a particular type of loan, designed to cover the total cost of all your other debts. This loan is then used in its entirety to pay your debts off leaving you with one simple monthly payment to handle. The benefits of a debt consolidation loan are obviously that it makes repaying your debts a much simpler process. But in addition, there is not necessarily any negative impact on your credit score, as the smaller debts are all being paid off by the new, bigger debt consolidation loan. So, provided you stay on top of your debt consolidation loan repayments, there should be no detrimental effect on your credit score.

IVA

An IVA has one thing in common with a debt consolidation loan: it results in one simply monthly payment for the debtor. However, it’s very different solution. Firstly, the IVA or Individual Voluntary Arrangement is a government introduced initiative designed as an alternative to bankruptcy. It essentially involves an agreement between a debtor and his or her creditors whereby a monthly repayment is negotiated based on what the debtor can realistically afford on a month to month basis. The payment is made each month for a set period of time, most often 5 years. This often amounts in total to significantly less than the total amount of the debts but at the end of that period, the debts are considered to be settled in full. Unlike a debt consolidation loan, an IVA can have a detrimental effect on your credit rating.

These are just two of the available debt solutions in the UK. What is hoped, however, with the recent announcement about compulsory debt management classes in schools, is that the future generations will rely less on debt solutions and more on good money management skills.