What is an IVA in the UK? Learn how they work

IVAs can give you major debt relief, but they come at a cost to your credit score. Read more to learn about IVAs and if they're right for your circumstances.
IVAs provide debt relief, but come at a cost to your credit score.

An Individual Voluntary Arrangement (IVA) is a legally-binding agreement between you and your creditors. IVAs protect you from certain legal actions and help you pay your debts off over a period of about five years. Ultimately, an IVA can release you from some debts after you complete the agreement.

However, IVAs have significant implications for your credit score, your finances for the next half decade, and your emotional wellbeing. Additionally, they’re not applicable to every person’s financial situation. That said, IVAs are a unique and effective debt-management solution that could offer significant relief depending on your financial situation.

Here, we’ll dig deep into what IVAs are, how they work, their benefits and drawbacks, alternatives, and how they can impact your life. We’ve got a lot to cover, so let’s dig right in!

How does an IVA work

As we mentioned, an IVA helps you manage and pay off your debts over a period of about five years, plus it protects you from legal actions initiated by your creditors. When your arrangement is in place, you’ll make a fixed monthly payment that covers some of your debts. Let’s break it down further.

The legal basis for IVAs

IVAs have their legal base in Part VIII of the Insolvency Act, 1986. The Act gives options for debt relief to people who are struggling with insolvency, while also ensuring that creditors receive a fair share of the person’s assets.

Who’s eligible for an IVA?

IVAs are typically only available if you’re struggling with a certain level of unsecured debt. There’s no legal minimum for the amount of debt you need to qualify, but many insolvency practitioners will adhere to their own minimums, often ranging from £6,000-£15,000.

Aside from that, there are very few eligibility criteria for getting an IVA. Here are the other boxes you need to check:

  • You must be 18
  • You need to live in England or Wales (Scotland residents: look into protected trust deeds)
  • You need to have a stable income with some disposable funds each month

You might not be eligible for an IVA if you have valuable assets. A general rule is that if you have assets that you could sell — like a luxury car, jewellery, or stocks — and their value exceeds your debts, you may not be eligible for an IVA. However, your home isn’t always included in this assessment.

What does an IVA cover?

IVAs can help you pay off common debts such as:

However, it’s crucial to note that IVAs don’t cover all debts. Some crucial exceptions to be aware of include:

*Note that an IVA can include these types of debts; however, those individual creditors need to agree to being included in the IVA, and in most cases they don’t agree to that. However, when it comes to your mortgage, your IVA terms will be structured in a way that allows you to make your regular mortgage payments.

Related read: What happens if you don’t pay your student loans?

Setting up your IVA

To start the process of getting an IVA, you need to connect with an insolvency practitioner. After you have connected with them, they’ll look into your financial situation to determine what you can reasonably afford to pay. This means that they’ll need to see things like your:

  • Bank accounts
  • Pay slips or equivalent documents
  • Assets, like your home, vehicle, or business if you’re self-employed
  • Debts

After digesting that information, your insolvency practitioner will calculate how much you can reasonably afford to pay each month. That payment will be the foundation of their proposal to your creditors.

What your IVA proposal will typically include

In addition to the monthly payment determined by your insolvency practitioner, your IVA proposal to your creditors will include things like:

  • A thorough breakdown of your overall financial situation: This includes your debts to each of your creditors, your income, and your regular expenses.
  • Information about your assets: This could detail any assets you have that could be sold to repay creditors. Likewise, it could also detail assets that will be protected from that.
  • Details of the proposed agreement: This will mainly refer to the agreement’s duration (which is typically about five years), how much creditors can expect to recover, and how much will be written off upon completion. Your insolvency practitioner will also contrast this to how the creditors would fare if you were to be declared bankrupt.

Finally, the proposal will inform your creditors how they can vote on the agreement.

Getting your IVA approved by your creditors

After your insolvency practitioner submits your IVA proposal to your creditors, they’ll need to vote on it individually. At least 75% of your creditors must agree to your proposal for your IVA to start. However, that 75% refers to the amount of debt you owe.

To clarify, imagine that you have two creditors: you owe one £8,000 and you owe the other £2,000. The creditor to whom you owe £8,000 must agree for your IVA to be implemented, as they’re owed over 75% of your debt. However, if they agree and the creditor to whom you owe £2,000 disagrees, your IVA will be implemented anyway for the same reason. And if you owe two creditors £5,000, they both have to agree for your IVA to be implemented.

Working with your insolvency practitioner

If you’re pursuing an IVA, your insolvency practitioner will be a huge asset for getting you out of debt successfully. However, they’re also responsible for keeping you in line. While they guide you through the IVA process, they’ll also supervise your adherence to the agreement’s terms. So, if you fall behind on payments, they’re within their right to end the agreement or start the process to declare you bankrupt.

Keep in mind that when you set up your IVA, you’ll typically need to pay a fee to your insolvency practitioner in addition to ongoing management fees.

Advantages and drawbacks of IVAs

While an IVA can protect you from legal action by creditors and may lead to a portion of your debt being written off upon completion, it's important to consider the impact on your credit rating, potential fees, and the strict requirements during the arrangement. Let’s take a look at those pros and cons more closely.

Advantages of an IVA

For many people who feel trapped by debt, an IVA is one of the best ways to get their finances under control. Some of the reasons for that include:

IVAs offer a legitimate end

One of the main advantages of an IVA is that some of your debts can be written off at the end of the agreement. Of course, this only happens when you’ve fulfilled your part of the bargain, but it is a very compelling advantage.

At the end of your IVA arrangement, your insolvency practitioner will issue a certificate of completion, which states that you’ve adhered to and completed the agreement. When this happens, the remaining debt included in your agreement will be written off.

Keep in mind that if you slip up during your IVA, your arrangement could be extended. Additionally, your agreement could contain additional rules that exclude certain debts from being written off at the end of the agreement.

You enjoy relative privacy

While it’s healthy to talk about personal finances with people you’re close with, there is often a stigma associated with financial distress. While your IVA will be included in public records, it’s not something your friends and family are likely to stumble across. This allows you to keep your financial journey relatively private compared to bankruptcy, which is typically published in The Gazette.

Drawbacks of IVAs

IVAs offer relief, but that relief doesn’t truly come until you complete the agreement. Until then, and after that point, there are several drawbacks to be aware of. Let’s take a look at them.

IVAs damage your credit score

If you’re struggling with debt, you will have significantly damaged your credit score by the time you apply for an IVA. However, the IVA will damage your score further.

Your credit score and credit report essentially represent how likely you are to repay lenders and creditors. An IVA tells lenders that you weren’t able to pay creditors back in the past, which can make it difficult to secure credit within the six years’ time.

Your IVA will be visible in your credit report and stays for six years, just like a County Court Judgement or default.

You have limited options for borrowing

If you have an IVA, you can’t get more than £500 in credit without your insolvency practitioner’s approval. There are a few exceptions to this, such as if it’s necessary for insurance or utilities like water, but it makes getting credit a challenge.

However, while you have an IVA, borrowing or getting credit will be difficult at any rate because your credit score will be significantly damaged.

The risk of bankruptcy still exists

IVAs can be a lifeline if you’re struggling with debt. However, it’s essential that you follow the terms of your agreement without the slightest variance. If you fail to follow the terms of your IVA, your insolvency practitioner can start the process of declaring you bankrupt.

An IVA’s impact on your life

By now, you’re aware of how an IVA can impact your life in a few ways. It can relieve you of unmanageable debt, but it can also damage your credit score. It puts a legitimate end in sight, but it also dictates how you use money for the next half decade. However, it’s important to be aware of a few other ways an IVA can impact your life, for better or for worse.

Your IVA can affect your employment prospects

First, since IVAs will show up on a credit check, it may limit your ability to work in certain roles or sectors, particularly in finance and accounting. While being legally barred from certain positions (like being the director of a company) is reserved for cases of bankruptcy, employers may be hesitant or have internal rules about hiring people with IVAs. If you’re employed in a role where managing money is a core part of what you do, an IVA can hurt your ability to find employment.

IVAs can have psychological impacts

Depending who you ask, IVAs can be a blessing and a curse. They offer immense debt relief, but it comes at the cost of a great deal of pressure. While your IVA’s terms are typically structured in a way that should be affordable based on your current financial situation, the psychological weight of the agreement can be hard to bear.

Each day at work can feel stressful, knowing that your IVA depends on your performance. A snippet of news about layoffs, inflation, or any other economic turbulence can send you into a worry over your ability to meet your obligations with your IVA.

But it’s not all bad. For many people, IVAs are free. It gives them the opportunity to be more present with their families, focus on and enjoy their work, and take solace in having a plan in place.

Naturally, no two people have identical circumstances, so your psychological experience of an IVA will be unique. The important part is to take the time to make sure it’s right for you so you can be confident in your decision, and to speak to someone if you’re feeling hopeless.

Get in touch with your local NHS mental health helpline

Alternatives to an IVA

What’s right for some people might not be right for you. Before you pursue an IVA, consider alternatives like the following:

  • Debt Management Plans (DMP) differ from IVAs in multiple ways, most notably in that they’re informal and not legally binding, and that they don’t write off your debt. However, DMPs do typically make your payments more manageable.
  • Bankruptcy isn’t something you plan for, but in some cases it might be the right course of action. Bankruptcy will clear your debts and protect you from creditors like an IVA, but it comes at a cost. Bankruptcy can impact your privacy, your reputation, and cause you to lose critical assets like your home.
  • Debt Relief Orders (DRO) are similar to IVAs, but they’re designed for individuals whose income is too low to qualify for an IVA. If you qualify for a DRO, your debts will be released after 12 months if your financial situation doesn’t improve enough for you to resume making payments.

Life after an IVA

The damage an IVA does to your credit score makes it difficult to access credit products, and the ones you do qualify for may come with costly interest rates that can quickly land you back in debt.

Rebuilding your credit score

Taking actions that will get your credit score back on track can help you after your IVA. A great way to improve your credit score post-IVA is to demonstrate a strong payment history. Payment history is the most important factor that lenders and creditors look at when they assess your credit report.

By making your payments on time and in full, you can demonstrate to lenders that you’ve changed your financial habits and are capable of handling credit responsibly. A few ways you can demonstrate your ability to make payments include:

  • A credit builder card: Credit builder cards are essentially the credit builder loan version of a credit card. Instead of using the card and then paying off your balance, you add a balance to the card before using it.
  • A credit builder loan: Credit builder loans are kind of like reverse loans. Instead of receiving the lump sum up front and then making payments, you pay the loan off first and then receive the lump sum.
  • A credit builder account: Pave can help you actively build your credit score with a credit builder account* that helps improve your credit utilisation and payment history. We’ll report your payment behaviour to Experian, Equifax, and TransUnion to maximise the benefit to your credit score. Pave can also help you protect your payment history by tracking upcoming payments so you don’t miss a due date.

*Subject to approval. Additionally note that if you’ve been put on an IVA or debt management plan in the last 12 months, using Pave to build your credit score may not be a good idea. This is because even if you build your credit score, many lenders may not extend credit to you on the basis of you having such markers on your credit file.

Develop healthy financial habits

Without developing new, healthy financial habits, you could find yourself back in debt after you complete your IVA. To avoid being back in the stressful financial situation you just spent five years getting out of, focus on adopting better financial habits like:

Habits like these can ensure that you enjoy financial stability in your post-IVA life.

The bottom line on Individual Voluntary Arrangements

Individual Voluntary Arrangements are a complex financial solution, but if it’s right for your situation it can be a crucial lifeline. Understanding what IVAs cover, what your obligations are during the agreement, and their benefits and drawbacks is essential for determining whether it’s right for you.

About Pave

At Pave, we’re dedicated to helping people improve their financial wellbeing by improving their credit score. At Pave, we know that money is a huge source of stress for people across the UK. That’s why we’re dedicated to making personal finance easier, through educational resources like this and our app that can help you build your credit score — a vital indicator of financial health.

To read more credit-building resources, check out our extensive library of articles, or download the Pave app today to join the hundreds of thousands who have improved their credit score with Pave*.

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*Pave cannot guarantee an increase in your credit score.