How Much Debt Does An IVA Write Off ?

Introduction: In the realm of financial challenges, Individual Voluntary Arrangements (IVAs) have emerged as a viable solution for individuals grappling with overwhelming debt. An IVA acts as a lifeline for those drowning in financial distress, offering a structured approach to managing and ultimately alleviating debt burdens. One of the burning questions surrounding IVAs is just how much debt they can write off. Let’s delve into the specifics to shed light on this crucial aspect of debt relief.

What is an IVA? An Individual Voluntary Arrangement is a formal agreement between a debtor and their creditors. It provides a legal framework for repaying a portion of the debt over a fixed period, typically five to six years. During this time, the debtor makes affordable monthly payments to an insolvency practitioner, who then distributes the funds among the creditors. Once the agreed-upon period expires, any remaining debt covered by the IVA is legally written off, offering the debtor a fresh financial start.

The Debt-Writing Mechanism: The amount of debt an IVA can write off varies depending on several factors, including the debtor’s financial situation, the total debt amount, and the agreed-upon terms of the arrangement. IVAs are tailored to individual circumstances, ensuring that the monthly payments are realistic and affordable for the debtor.

During the IVA term, creditors are bound by the agreement and cannot pursue legal action or demand additional payments beyond what has been established. This freeze on interest and charges, combined with a structured repayment plan, allows debtors to regain control of their finances without the constant pressure of escalating debts.

Common Types of Debt Covered: IVAs are particularly effective in dealing with unsecured debts, such as credit card debt balances, personal loans, and overdrafts. These types of debts are often the primary contributors to financial distress, and an IVA provides a systematic approach to managing and eventually eliminating them.

While IVAs do not cover secured debts, like mortgages or car loans, successfully addressing unsecured debts can significantly alleviate financial strain, making it more manageable for individuals to meet their other financial obligations.

Factors Influencing Debt Write-Off: The percentage of debt written off through an IVA depends on the debtor’s financial circumstances and the creditors’ willingness to accept the proposed terms. Typically, debtors aim to repay a percentage of their total debt, often ranging from 25% to 50%, with the remaining balance being legally written off at the end of the agreed-upon term.

Negotiation Skills: The success of an IVA in writing off a significant portion of debt also relies on the negotiation skills of the insolvency practitioner representing the debtor. Skilled negotiators can work with creditors to secure favorable terms, maximizing the debt relief for the individual seeking financial recovery.

Conclusion: Individual Voluntary Arrangements offer a lifeline to those drowning in debt, providing a structured and legal framework for repayment. The amount of debt that an IVA can write off is contingent on various factors, including the debtor’s financial situation, the total debt amount, and the negotiated terms. While there is no one-size-fits-all answer, the potential for substantial debt relief makes IVAs an attractive option for individuals seeking a fresh financial start. It’s crucial for individuals considering an IVA to seek professional advice to navigate the complexities of the process and ensure the best possible outcome for their unique circumstances.

Qualifying For An IVA Criteria

To qualify for an IVA (Individual Voluntary Arrangement), you must meet certain criteria:

  1. You must have at least two debts that you are struggling to repay.
  2. You must owe a minimum of £6,000 in total to your creditors.
  3. You must have a regular income that allows you to make monthly payments towards your debts.
  4. You must be a resident of England, Wales or Northern Ireland.
  5. You must be insolvent, meaning that your debts exceed your assets and you are unable to pay your debts as they fall due.

If you meet these criteria, you can contact an Insolvency Practitioner (IP) who will assess your financial situation and advise you on whether an IVA is suitable for you. The IP will also help you to set up the IVA and will act as a supervisor throughout its duration.

What If I Am A Homeowner?

Yes, you can do an IVA if you are a homeowner. However, being a homeowner may affect the terms of your IVA, and it is important to understand how it could impact you before entering into the arrangement.

If you have equity in your home, meaning that its value exceeds the amount of your outstanding mortgage, you may be required to release some of that equity to pay off your creditors as part of the IVA agreement. This could be done by remortgaging or by selling your home, but it is important to note that you will usually be allowed to keep a certain amount of equity to ensure that you have a reasonable standard of living.

It is also important to note that if you are in arrears on your mortgage payments, an IVA may not be the best option for you. In this case, you should seek professional advice from an Insolvency Practitioner or a debt advisor to explore alternative debt solutions that may better suit your circumstances.

Can I Do An IVA If I Am Unemployed

To qualify for an IVA, you must have a regular income that is sufficient to make monthly payments towards your debts. If you are unemployed, you may not have a regular income, which could make it difficult to meet this requirement. However, if you have other sources of income, such as from a pension or benefits, this may be sufficient to meet the criteria.

It is also important to note that an IVA is a legally binding agreement that requires you to make regular payments towards your debts for a period of typically five to six years. If you are unemployed, there is a risk that you may not be able to make these payments consistently over the duration of the IVA, which could lead to its failure.

What If I Live Abroad

It may be possible to do an IVA if you live abroad, but it would depend on your individual circumstances and the terms of the IVA agreement.

To qualify for an IVA, you must owe at least £6,000 to two or more creditors and be a resident of England, Wales or Northern Ireland. If you live abroad, you may not meet the residency requirement, which could make it difficult to enter into an IVA in the UK.

However, it is still possible to enter into an IVA if you are a UK citizen and have debts with UK creditors, even if you live abroad. In this case, you would need to work with an Insolvency Practitioner who is licensed to act in the UK and can help you set up an IVA remotely.

It is important to note that if you do enter into an IVA while living abroad, you will need to make regular payments towards your debts and communicate with your Insolvency Practitioner regularly. This may be more difficult to do if you are in a different time zone or if you do not have access to reliable communication channels.

9 Main Differences Of An IVA vs DMP

In short, the main differences between an IVA vs a DMP is that an IVA is a formal solution that both you and your creditors must stick to, usually over 5 years. A DMP is an informal debt solution meaning neither yourself nor your creditors are obliged to stick to the plan.

Both plans have many more differences and their own pros and cons. In this article we will help explain the differences between both plans and that will hopefully help you understand which solution is better for you. Below are the main differences between an IVA and a Debt Management Plan.

An IVA like a Debt Management Plan allows you to consolidate your unsecured debts into one affordable monthly payment which will then be distributed amongst your creditors. Your monthly payment will be determined by examining your affordability through your income/expenditure.

1. Creditor Protection

An IVA is administered by an Insolvency Practitioner who will work on your behalf to find a repayment scheme to pay back your creditors. With an IVA you are protected from your creditors who are no longer allowed to hassle/chase you for your debt. Your creditors will no longer be allowed to charge you anymore interest and charges.

With a DMP, a request is made to your creditors to freeze interest and charges which they are not obliged to accept. Usually, creditors will accept this request for a set period (6 months) whereby a new request will have to be put forward.

2. Length Of Plan

With a Debt Management Plan, this will continue until either your debts are paid off or you or your creditors terminate the plan. They tend to last longer than an IVA as there is no debt being written off with a DMP. A reputable debt firm will provide you with an estimation of when the DMP will finish – subject to interest and charges being frozen

An IVA will usually last 5 years, possibly 6. You will know at the start of an IVA how much you will need to pay into your IVA each month and when the plan will finish.

3. DMP payments are flexible, IVA payments are not

With a DMP, your monthly payments are flexible, so if your working hours drop or your expenses unexpectedly increase, you can adjust you monthly payment so that it remains affordable. This will make your DMP last longer and decreasing your monthly payment should only be considered if you are genuinely struggling. Conversely, if your income increases and your disposable income increases you can pay more into your debt management plan.

With an IVA, your payment is fixed from month one. If you do have some financial struggles during your IVA there may be an option to decrease your payments slightly or have a 9 month payment holiday. Generally, an IVA would fail if you cannot maintain the monthly payment agreed. If an IVA fails, you will be back to square one and may be forced to consider bankruptcy

4. Debts Written Off With An IVA

This is the one most of you will want to know – how much debt can be written off? The frustrating answer is, its depends on an individual’s circumstances. At the end of an IVA, any remaining unsecured debts will be written off. This can be as much at 80% written off in some extreme cases. With a DMP, none of your debts will be written off and your debt plan will finish once your debts have been paid off.

5. IVA & DMP Fees

An IVA will generally be more expensive to setup however the fees will be incorporated into your monthly payment, just like in a DMP so you won’t be receiving additional bills on top of your monthly payment.

6. Running The Plan

An IVA needs to be administered by a licensed insolvency practitioner, which is why the fees for an IVA tend to be higher. You will have to go via a professional debt company or a debt charity such as stepchange to start your IVA application. A Debt Management Plan can be run by a debt management company or by yourself. There are also debt charities which can help setup you debt management plan without charging a fee . If you want to go down the route of managing it yourself, there are some free templated letters you can download at the National Debt Line

7. IVA Creditor Meeting

An IVA is subject to a creditor meeting whereby the majority of your creditors have to agree. There is no creditors meeting with a DMP

For an IVA to be approved, 75% by the value of your debt of creditors who vote at the meeting have to agree. If you have one creditor who you owe a large sum to, they have the power to veto the IVA. Your insolvency practitioner should have enough experience to know which creditors will be difficult and will discuss this with you if he thinks they may be problematic.

For a DMP, each creditor is proposed individually. Even if one of your creditors rejects the proposal, it is still possible to continue with the DMP whilst negotiations continue with the tricky creditor. Not every creditor may agree to freeze interest and charges.

8. Your Credit Rating After AN IVA AND A DMP

Both solutions are highly likely to have an effect on your credit rating. If you are behind with debt repayments, it is likely your credit rating has already been damaged and your ability to borrow money will be low.

An IVA will affect your credit rating more seriously compared to a DMP. It will be very difficult to borrow money when on an IVA. The mark on your credit rating will last for the duration of your IVA.

Being on a DMP is will certainly affect your credit score. This is because you will be paying less than the minimum repayment agreed when you took out the debt. You may be required to remortgage or release equity during your IVA

9. Public Details

Anyone who enters an IVA will have their details published onto a public database called the insolvency register. With a DMP, your details are kept confidential

Am I Eligible for an IVA or a DMP?

The criteria for an IVA is slightly more strict than for a DMP. To qualify for an IVA you must :

  • Have over £5,000 of unsecured debt
  • Be able to afford at least £100 per month towards your debts
  • Live in UK (but not Scotland)
  • Owe to two or more creditors.

The criteria for a DMP is more subjective to the company you apply to. As a general rule of thumb, to qualify for a DMP you must have:

  • Over £3,000 of unsecured debt
  • Be able to afford at least £80 per month, some company’s may go as low as £60 per month
  • Live in the UK
  • Owe to two or more creditors