An Individual Voluntary Arrangement (IVA) is designed as an alternative to bankruptcy. An IVA is a form of debt management for when you run into substantial debt problems.

IVAs were first introduced in 1986 and were originally designed as a way for small businesses in financial trouble to avoid bankruptcy. No longer limited to businesses, VAT can now be taken out if you have unsecured debt of at least £20,000 and live in England, Wales or Northern Ireland. VATs are not available in Scotland; instead, the closest equivalent is a secured trust deed.

A legally binding contract, the VAT will be established through the county court, between you and your bank or credit card company. An IVA cannot be set up yourself; instead, you will need the help of an Insolvency Practitioner (IP)

When taking out VAT, the IP will consider your assets and income to assess what you can pay as an initial lump sum and how much you can pay each month.

The IP will then put together a proposal to show all of your creditors the best payment plan you can offer them. Once the proposal has been made, the insolvency administrator can apply to the county court for an interim order. This order will prevent creditors from starting bankruptcy proceedings or taking any other action without the permission of the court.

The proposal prepared by the IP will be sent to your creditors for their consideration. For VAT to be granted, 75% of your creditors “by value” must agree with the proposal. As a VAT is determined “by value”, if the company to which you owe the most money rejects the Proposal, it is unlikely that VAT will be awarded. If an IVA is agreed, the interest on the debts will be frozen for the duration of the agreement and creditors will not be able to contact you regarding the debts. A standard IVA is set to last for five years or 60 months. As long as you make the 60 monthly payments, the rest of the debt will be paid off.

Advantages of a VAT

– VAT payments are based on what you can realistically pay

– Selling your house is not a normal requirement

– Unlike bankruptcy, there are no employment restrictions: bankruptcy excludes you from certain professions, including accounting and practicing as a lawyer. He too cannot join the armed forces or the police and is restricted from becoming a company director or local councillor.

– As long as you comply with the plan and can remortgage your home for up to 85% of the value, the rest of your unsecured debts that you cannot pay are canceled

– Once an IVA has been agreed, all your creditors are bound by the terms

– As long as you meet the agreed payments, your debts will be frozen, you will be protected from any further legal action and creditors will stop communicating with you about your debts.

Disadvantages of an VAT

– Entering a VAT is a substantial commitment and is only suitable for people who can make all the monthly payments for the duration of the agreement.

– There is a high cost involved in creating a VAT and you may need to pay a fee up front

– An IVA is only available to people who do not have enough equity in their home to cover all their debts

– An IVA must be agreed upon by 75% of your creditors in terms of the value you owe, not the number of creditors, so if the company you owe the most money to votes against, the IVA will most likely fail .

– Not all debts can be included in an IVA, debts that can be overdrafts, personal loans, credit and store cards, student loans and catalog debts

– An IVA will affect your credit rating and will appear on your credit file for 6 years

– If IVA fails, you can still end up bankrupt

– Banks and credit card companies are very strict about what is considered essential, vacations, gifts and gym memberships will be considered luxuries and cannot be included in your budget.

– Minimum debt is £25k individual/£40k joint