A Guide to IVAS

Individual Voluntary Arrangements (Iva) were introduced onto the financial market in 1986 and were originally aimed at offering small businesses an alternative to bankruptcy.

However, now anyone who has unsecured debts of around £20,000 or more can take out an Iva, in a bid to consolidate their debts and clear them over a fixed term.

This is a fairly drastic action and is usually an alternative to bankruptcy, for those who have maxed out other avenues, such as zero per cent credit cards and taking out a quick loan.

It is a legally binding contract between the person taking out the Iva and the bank or lender and will need to be drawn up with the help of an insolvency practitioner or a solicitor.

How does an Iva work?

Established under the Insolvency Act 1986, an Iva allows an individual who has more debt than they can manage to strike an agreement whereby they pay money into a fund each month, over a five-year-period.

The total amount the debtor pays is normally less than the final amount they owe, but an agreement is reached with the creditors that this will be acceptable.

One snag can be that creditors do have to agree to an Iva, in order for an individual to be able to deal with their debt in this way.

According to consumer debt service Clear Start, 75 per cent of creditors agree to Ivas, so long as debtors do not propose to repay less than 25 per cent of the total amount owed.

What are the benefits?

The main benefit of entering into an Iva is avoiding bankruptcy. This means that debtors are more likely to keep their homes and other assets, i.e. cars.

Furthermore, although there will be lending restrictions on the individual once an Iva ends they will be far less than for someone who has been declared bankrupt.

In more immediate terms, an Iva freezes an individual's debt and helps give them back some control over their finances.

Realistic payment goals, usually of around £200 per month, are established.

This means that the debt stops accruing interest and furthermore these agreements usually mean that around 20 per cent of the debt is written off.

What is the downside?

Money-saving expert Martin Lewis advises those in debt to think long and hard before taking out an Iva.

He says: "Ivas are not an easy get out of debt card. They are an alternative to bankruptcy and should only ever be considered in that light."

Furthermore, although in most cases those who take out Ivas will be able to keep their homes they will still be expected to release a significant share of their equity.

Also, if the individual's income increases over the five-year-term or if they experience a windfall, their repayments will go up accordingly.

There is also a public record of anyone who has ever taken out an Iva and while making Iva repayments debtors will not be granted any further unsecured credit, i.e. zero per cent credit cards.

Finally, if a debtor enters into an Iva they can not keep up with and defaults are made on the payments, then bankruptcy proceedings can be started against them.