Learn How the IVA Works
It is very easy for the average person to amass a huge amount of debt. After all, incomes are often fixed, while the cost of living and financial commitments increase with time. The government recognizes the predicament many consumers often find themselves in when they have too much debt. While there are laws allowing consumers to declare bankruptcy, the option is often considered the last resort. There are several other debt solutions that taxpayers can use to get out of the debt without the punitive consequences of bankruptcy. For instance, residents of Wales and England have the option of using an IVA, or Individual Voluntary Arrangement to offset their debts.
What is an IVA?
This is a formal agreement between you and your creditors to clear your debts. With an IVA, you can either pay off all or part of your debts. The payment can be lump-sum or divided into monthly instalments you can afford.
How it Works
To qualify for an IVA, you must owe a minimum of £5,000 to at least two creditors. However, some IVA providers only handle cases involving debts exceeding £15,000. If you have this level of debt, which you are unable to service, you should consider seeking debt help from an insolvency practitioner. If creditors are planning to take action against you, the insolvency practitioner (IP) can petition the court to issue a temporary order to stop creditors from taking any legal action against you until the necessary arrangements for this debt solution are made. If creditors have already taken action, the IP will simply ask for an adjournment.
The IP will need detailed information about your finances to analyze your case and draft a proposal to present to creditors. You will be required to provide the IP with a list of all your income sources, debts, creditors and assets. If you own a house, the IP will also need to know the amount of equity you have in it. In many cases, you may be asked to remortgage the house and use the funds to offset part of your outstanding debt. The IP will then help you draw up a plan on how your debts can be offset. The proposal will take into consideration; your average monthly income, mortgage payments, living expenses, fees for dependents among other essential expenses. The proposed repayment plan can have a term of 3 to 6 years depending on the amount owed to creditors.
In addition to drafting the proposal, the IP is also required to make a report to the court. The report must include a detailed financial statement showing your assets, income, expenditures, creditors and debts. It must also be submitted together with the proposal on how your debts will be settled and state the repayment period as well as the amount of debt that can be repaid. The report will also include reasons why creditors should accept the proposal instead of seeking to have you declared bankrupt. A good reason would be that creditors are going to get back more of their money than they would through bankruptcy.
The Creditor's Meeting
Once everything is ready, the IP will schedule a suitable date for the creditor's meeting, which will be held at the IP's office. You can attend in person or by teleconference, whichever is easier. Creditors, on the other hand, can send representatives. During the meeting, the IP will give creditors the gist of the proposal and seek their views before asking them to vote. In some cases, creditors may ask for changes, but you do not have to accept them. For the proposal to be accepted, creditors who own at least 75% of your debt must vote in its favour.
Paying Your Debts
Once the proposal is accepted, it becomes legally binding. You will be required to send the specified monthly instalments to the IP, who will be in charge of disbursing the payments to your creditors. The IP will also deduct the setup and handling fees from the monthly instalments.
Benefits of IVA
The main benefit of this debt solution is that it allows you to pay off your debts through affordable monthly instalments. Once it is accepted, creditors cannot take action against you. Most of your debts will most likely be written off if you honour all the terms and conditions of agreement to completion.
Like many debt solutions, IVAs also come with certain shortcomings. For instance, your credit rating will be affected. Your name will also be published in the public register. If you are asked to remortgage your home, you may end up with a high interest mortgage, which is undesirable. Therefore, it is crucial you seek debt help to explore your options before deciding to use an IVA.