IVAs explained

An IVA (Individual Voluntary Arrangement) is a debt solution designed for people with particularly large debts - usually £15,000 or higher. It can allow you to avoid bankruptcy by agreeing to repay a set percentage of your debts to your lenders over a pre-agreed time period (usually five years), after which the remaining debt will be written off.

As with any major financial decision, it's important to understand what an IVA involves, and what the consequences are if you fail to keep up on the agreement. Here is a quick guide to how an IVA works.

How an IVA works: step-by-step

#1: Speak to a debt adviser
Before you can apply for an IVA, you will need to speak to a professional debt adviser or an Insolvency Practitioner to discuss your situation. It may be that another debt solution is more appropriate for your circumstances - a good debt adviser can let you know whether this is the case.

If your debt adviser thinks an IVA is your best option, they will refer your case to an Insolvency Practitioner, who will work with you to draw up your IVA proposal. This details how much you are able to pay towards each of your debts, based on how much you can afford after your essential costs have been covered.

#2: The IVA proposal is sent to your creditors
Your creditors will be invited to approve the IVA proposal. This gives your creditors the opportunity to 'vote' either for or against the IVA terms. For the IVA to go ahead, creditors accounting for 75% of the total debt must approve the IVA.

#3: The IVA begins
If your creditors approve the terms, then the IVA can begin. You will make a single monthly payment to your Insolvency Practitioner, who will be responsible for distributing the agreed amounts between your creditors on a pro rata basis (based on what proportion of your total debt is owed to each). This will normally continue for five years.

Since an IVA is a legally-binding agreement, both you and your creditors must abide by the terms: you must keep up your payments for the duration of the agreement, while your creditors cannot pursue any further action against your debts. Interest on your debts is frozen, meaning they cannot continue to grow.

#4: Equity release in final year
If you are a homeowner, you may be expected to release some of the equity in your home in the 54th month (half way through the final year) of your IVA.

#5: 60 months - the IVA is complete
Once you have made your final payment (usually in the 60th month, but this depends on your terms), the IVA will be complete. Any remaining unsecured debt (in relation to the IVA) will be considered written off, leaving you to get on with your life as normal.

However, be aware that an IVA remains on your credit report for six years after it begins - so even once your terms have finished, the IVA will be recorded for a further year. This will make it more difficult to obtain credit until this period has expired.