Credit Score Basics > What is an Individual Voluntary Arrangement (IVA)?

What is an Individual Voluntary Arrangement (IVA)?

Wollit Team4 minute read · Updated 2nd July 2024

An IVA (Individual Voluntary Arrangement) is a way to deal with debts you're struggling to pay back. It's a legal agreement between you and your lenders that lets you repay your debts over an agreed period (usually 5 to 6 years).

The way it works is fairly simple: you give them a portion of your salary each month or pay them a lump sum. In return, your lenders may agree to stop the interest from accumulating, and even to wipe out some of your debt – meaning you won't need to repay the full amount you started with.

You can use an IVA for debts from:

Overdrafts
Personal loans
Credit cards and store cards
Council tax
Tax owed to HMRC
and hire-purchase debts.

An IVA can have a serious impact on your life, including by lowering your credit score. But, if managed well, an IVA can also help you get back on track and rebuild your credit profile over time.

How does the IVA process work?

First, you'll need to find and hire an Insolvency Practitioner (IP) to set up the IVA for you. IPs are usually qualified lawyers or accountants.

You can find an IP on the UK Government's official Insolvency Service page. Most IPs charge a standard fee for IVAs, but some might also charge for their advice – even if creditors don't agree to the IVA.

Once you've hired an insolvency practitioner, they will act as an intermediary and help you work out a repayment plan that takes into account how much you can afford to repay at a time.

The IVA will proceed as long as 75% of creditors approve the IP's proposal. Your monthly repayments will then go to the IP, who will split the money between the creditors.

Once the IVA agreement ends, your debt will be gone.

One thing to keep in mind: IVAs are available in England, Wales, and Northern Ireland. Scotland uses a "protected trust deed" – a similar solution but with different benefits, risks, and fees.

What are the IVA pros and cons?

Pros:

An IVA can turn an unaffordable debt into affordable monthly payments. For example, if you earn £2,000 and your living costs are £1,900, you won't be asked to pay more than £100 monthly.
An IVA is legally binding, meaning creditors can't take any action against you while you're repaying your debt. This makes an IVA one of the best ways to avoid a County Court Judgment (CCJ).
An IVA is time-limited, so repayments must be made only for a specific amount of time. Once the repayment period is over, you'll owe nothing more – even if there's leftover debt.
Because of this, an IVA can also help you write off some of the debt you can't afford.
An IVA stops the debt from accumulating more fees and interest.
An IVA puts your creditors' minds at ease and gives them a clear timeline for settling the debt.
IVAs are also removed from the Individual Insolvency Register fairly quickly – three months after the IVA ends.

Cons:

Hiring a qualified insolvency practitioner to set up an IVA can get expensive, up to £5,000 per IVA. They also charge fees for handling each payment afterwards.
If your circumstances change and you can't keep making repayments, the IVA will fail and could lead you into bankruptcy.
Sometimes, getting an IVA means suspending your licence for doing certain kinds of work – for example, if you're an accountant or solicitor.
Your pension might also have to be used towards the repayments – technically, it counts as income.

Can anyone get an IVA?

Unfortunately, no – only some debts qualify for an IVA. Here are some of the usual eligibility conditions:

You must earn some income so you can afford to make the monthly payments.
The IVA needs to include at least 75% of your debts.
You must have three or more creditors.
All the relevant creditors must agree to the IVA.
The debt must also be pretty large so that the fees involved make sense – at least £5,000.
Student loans, fines, or child support are not eligible.
And of course, if you live in Scotland, you can't get an IVA. In that case, you may be able to apply for a Protected Trust Deed, which works about the same.

How will an IVA affect my life (and credit score)?

An IVA usually lasts for 5-6 years, although it can be extended if you consistently miss payments.

Here are some of the ways the IVA will impact your life during these years:

You can only borrow up to £500 during your IVA. If you need more, you'll have to get approval from your insolvency practitioner.
Even if the insolvency practitioner approves, you'll find it harder to get approved for credit, anyway – your IVA will be public on the Insolvency Register for six years, and lenders will be able to see it.
And even if you get approved, it will usually be for a small amount and come with a very high interest rate.
Your credit score will also take a major hit.
You might be asked to sell valuable items to repay your debts and even return things you're still paying off. The insolvency practitioner might make an exception if you need those things for work – for example, a car or laptop. But you might still be asked to trade them in for a cheaper version.
You'll also be asked to use your savings to pay the debt.
Any money you might come into during the IVA – for example, an inheritance or a bonus at work – you'll have to direct towards the IVA repayments.
You might also have to stop practising if you're an accountant or lawyer.
If you're self-employed, you might also find it harder to get new clients – companies usually check if someone's on the Insolvency Register before doing business with them. The HMRC will also be notified.

So, is getting an IVA a good idea?

If you're struggling with debt and you find yourself using your credit card or even payday loans to cover bare essentials, then an IVA can be a good idea.

Yes, it will damage your credit score and significantly impact your life. But it will also put you on a path to writing off a big piece of your debt in an affordable way.

Most importantly, while an IVA can be a useful and realistic way to deal with debt, remember that it's not the only one. You can also ask for a Debt Relief Order or even declare bankruptcy yourself.

The best way to figure out what is the best solution for you is to speak to a free, independent debt charity. Here's the official UK Government page where you can find registered debt charities.