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Using An IVA to Reorganise Debt

When you’re in debt, the guilt and stress that goes with it can be all-consuming. It can affect your sleep, your health, and your relationship and family life. The worst thing you can do when in debt is to ignore the problem. Even if it feels like you will never be free of debt, the best way to tackle the problem is to start building a strategy to pay the debt off.

How you do this depends on how much debt you are in. In the UK, if your debts are over £10,000 you may want to consider getting IVA advice.

An IVA is an Individual Voluntary Arrangement which is an agreement drawn up in court between you and your creditors.

IVA Debt ManagementIVAs are designed to provide those with serious debt levels with a structured and achievable plan to pay back their debts without having to declare bankruptcy. An IVA is organised on your behalf by an insolvency practitioner and all unsecured debts must be declared. IVAs usually run for a five-year period and payments are set to be achievable after accounting for reasonable living costs. The IVA was established by and is governed by Part VIII of the Insolvency Act 1986 and constitutes a formal repayment proposal presented to a debtor’s creditors via an insolvency practitioner (IP). Usually (but not necessarily), the IVA comprises only the claims of unsecured creditors, leaving the rights of secured creditors largely unchanged. Insolvency practitioners charge initial and ongoing fees that are in addition to the debt.

Payments are based on your personal financial situation. Your monthly payment will be calculated before any negotiations with creditors take place. They are designed to spread out your payments over 5 years and can change depending on any changes in your income. Once the final payment is made, any outstanding debt is legally written off. An IVA arrangement can write off a significant portion of your unsecured debt – in many cases more than 70%. Homeowners may be required to release equity at the end of the 5 years, however, your home is never at risk.

Because it is “Voluntary” creditors don’t have to agree to an IVA, but most will, as it’s an effective way of getting their money back and it avoids the hassle and expense of bankruptcy proceedings and ongoing collection issues. Generally, interest and charges are frozen at 0% during the IVA and creditors will agree not to impose additional penalties. Once the IVA is accepted your  insolvency practitioner’s role becomes that of supervisor, monitoring the IVA’s progress and ensuring that the terms and conditions that were agreed to at the creditors meeting are properly adhered to, thereby shifting the responsibility to the IP and making it easier on both the debtor and the creditor. The insolvency practitioner acts as supervisor during the agreement, taking the monthly payment from the debtor and redistributing it amongst the creditors on a pro-rata basis.

Your financial situation is reviewed annually during the IVA and if your income goes up, then your repayment amounts will be increased to reflect this. Failure to meet the repayment schedule will result in the failure of the IVA, so you must be prepared to take the agreement seriously. After the agreement has finished, provided that you have kept up your repayments, you will then be clear of debt, regardless of how much debt has been paid.

IVAs aren’t suitable for everyone, but they can be a great solution for those seriously in debt who wish to avoid bankruptcy. Always seek independent financial advice before signing any legally-binding debt solution.

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