Individual Voluntary Arrangements

Debt is part of the fabric of life for many people in the UK.

The figures speak for themselves: total personal debt is more than £1.25 trillion; each adult in the country owes on average £26,971, including mortgages; recent data from the Insolvency Service showed that the number of insolvencies in England and Wales leapt by more than 55% to hit a record 27,644 in the three months to September.

What happens when you are unable to manage your debts? The days of the Debtors Jail and personal ruin are thankfully over, but bankruptcy can still have a significant effect on different aspects of your life, not least your ability to gain credit in the future.

Individual Voluntary Arrangements are an increasingly popular way for those in debt to avoid bankruptcy while repaying a portion of what they owe.

IVAs have been available since the 1980s, when they were set up as a vehicle for sole-traders to cut their debts without going under. They are a legal contract between lenders and a borrower to make an agreed monthly repayment. They are only available to people in England and Wales. In Scotland, Trust Deeds operate in much the same fashion.

How does an IVA work?
To qualify for an IVA, 75 per cent or more of your creditors must agree to it. The Government wants to cut this figure to 50 per cent by the end of 2007.

You apply to take out an IVA through an Insolvency Practitioner. The largest such practitioners on the market are Debt Free Direct and Accuma.

The firm charges a nominee fee of between £1,000 and £2,500 at the start of the contract. Once the IVA is up and running, you pay the firm between £500 and £900 in the first year of your IVA, to maintain the contract.

Debtors usually pay between a third and half of what they owe. The interest is frozen.

Before the IVA proposal is put to the creditors, the individual needs to sign a 'statement of truth' about the financial circumstances, which needs to be read by a solicitor. A creditor meeting then considers the proposal.

You must keep up your agreed repayments, usually over a period of five years. If you miss a repayment, your creditors can sell your debt on to a debt collection agency, which means higher interest charges.

If your circumstances change during the repayment period, for better or worse, you must keep your IVA provider updated. It will review your case and set your repayments higher or lower as is appropriate.