There is a lot of perception that IVAs are a scam and are not a legislated scheme. Well to bring some clarity, here is a brief overview and history of IVAs, and how they became one of the most popular debt solutions in the UK.
A Brief History of IVAs
In the 19th century debt was rather more public. Around 10,000 people were imprisoned each year in debtors’ prisons, where you would stay until you could pay off your debt. As few had the resources to do that, they would be required to work to pay their creditors – and pay for their upkeep. Bankruptcy had been an option for centuries, but not for the working class.
Things began to change in 1869 with the Debtors Act, which reduced the powers of the court to imprison people for debt. Despite this and an initial drop in the prison population, numbers continued to increase into the 20th century.
When were IVAs introduced by the government?
Insolvency law changed only very gradually over the following century. Bankruptcy rules were relaxed a little, so you no longer needed to be a member of the merchant class or above to take advantage of it, but bankruptcy remained largely the only solution for people and companies facing unmanageable debt.
This became an increasing problem. Bankruptcy was, and to a large extent remains, the ‘nuclear option’. For individuals it meant (and often still means) losing your home. For companies, it meant they had to cease trading.
In the recession of the late 1970s and early 1980s, with millions out of work, high inflation and a stream of business closures, the government needed to find an alternative way for businesses to manage their debts in a way that didn’t result in closure. It wasn’t just the debt-laden businesses that needed help. Bankruptcy left very little for creditors too, so a solution was sought that would benefit both parties.
The result was the Insolvency Act 1986, which introduced the Individual Voluntary Arrangement (IVA) to England and Wales for the first time.
Benefits of early IVAs
The first IVAs were intended as a solution for businesses only and proved highly successful. Compared to bankruptcy they offered several significant advantages:
- No closure: The company was able to continue trading, ensuring no or fewer jobs were lost, and giving the company a fighting chance of recovery
- Debt write-off: The company’s unmanageable debts could be written off, freeing the business from hefty interest payments and a debt spiral
- More for creditors: Although they would still lose money in an IVA, creditors would lose less than in bankruptcy
When did IVAs become available to individuals?
Individual IVAs appeared in the late 1990s fuelled by the boom in consumer credit. Take up was slow initially – fewer than 5,000 were granted in 1998. But by 2006 numbers had exploded to 44,300.
Will anyone know about my IVA?
Today, your insolvency is likely to pass unnoticed by virtually everyone who knows you unless you tell them. Yes, your IVA will be placed on the Insolvency Register, but you have to work pretty hard to find it.
Popularity brought its own concerns. IVAs were often used as a sort of default option – the automatic debt management choice, even when they were perhaps not the right debt management choice. Consumer groups pushed for greater regulation and in 2008 it arrived in the form of the IVA Protocol.
The protocol was and remains voluntary but was the first attempt to establish “an agreed standard framework for dealing with straightforward consumer IVAs.”
The protocol ensured that:
- IVAs were not the first option, but one reached only after a payment plan had already been considered
- Consumers’ income and outgoings were checked to ensure an IVA was the right solution; and
- Creditors could not reject an IVA proposal without a specific reason
The protocol has been refined several times since 2008, most recently in 2016, but it has proved successful in giving consumers greater clarity, certainty and protection.
Today, personal insolvencies in England and Wales are running at their highest levels since 2010 and IVAs are at their highest ever levels. Scotland is also seeing increased numbers of personal trust deed applications (the Scottish equivalent of IVAs), with numbers approaching 2013 levels.
So if you are facing debt problems right now, know that there are thousands of people in a similar position to you, and that the level of protection surrounding your debt management solution has never been greater.
For help in finding your way out of debt, talk to us.
More IVA Resources
Are IVA’s a government backed scheme?
IVA’s were introduced in 1986 and form part of the Insolvency Act (1986) to help people who are struggling to pay their debts. Unlike debt management, they are a legislated and formal debt solution meaning that the IVA agreement is legally binding, which can help to eliminate harassment from creditors.
Will I lose my home in an IVA?
Unlike bankruptcy, you wouldn’t usually lose your home in an IVA. If you own your home and have equity you may be required to release it so the IVA company can pay your creditors (that is, the people and organisations to whom you owe money). Read more here.
Will an IVA affect my credit rating?
Your credit rating will be affected whilst on an IVA and will stay on your credit file for up to 6 years. Any debt solution will affect your credit rating, but at the same time if you’ve missed payments and defaulted then your credit file will be affected anyway, as a default also stays on your file for up to 6 years. Read more here.
Do I need to know who I owe before I apply for an IVA?
It’s not a problem if you cannot remember all the people you owe money to before you apply for an IVA. A lot of people forget as they may have been taken out a long time ago. We have systems which can find all your debtors.
How much debt can I write off with an IVA?
The amount of debt that can be written off with an IVA very much depends on personal circumstances, such as your current employment status, debt level and disposable income. The maximum is 90% of unsecured debt but the average is around 60%.
How can I apply for an IVA?
There are 4 ways to apply for an IVA. 1: Call us on 0800 193 1024. 2: Apply online here. 3: Chat with us on live chat. 4: Apply through our Facebook page. The IVA application process is very simple and can be setup in as little as 24 hours. The speed usually depends on how quickly you can get information to us.
I’m thinking about an IVA. But what happens if I have no money spare at the end of the month?
It’s still worth exploring options with a debt management professional. They may be able to help you make your budget stretch further. If not, they will be able to give you advice about which is the right debt solution tool for you. That could be an IVA (in England, Wales or NI) or a protected trust deed (in Scotland) but there are several other potential options.
What happens if my circumstances change?
Talk to your IVA insolvency practitioner. They may be able to get agreement from creditors to a temporary reduction in payments or a longer repayment period to help you over a difficult period.
Why is my bank taking money from my account to pay my debts?
Banks hold an automatic ‘right to offset’. This means that if you have money in a bank account and unpaid loans or credit cards with the same lender, they can take the money in the account to pay off the debts. More confusingly, this can also happen when the debt is owed to a company also owned by your bank.
So, for example, if your bank account is with HSBC and you have an unpaid credit card with M&S Bank or First Direct, a right to offset could be used to pay those debts, because HSBC owns all of them.
You can find more about which banks are subsidiaries of other banks here.
In an IVA, and to avoid the right to offset, you may be required to switch bank accounts.
Will an IVA affect my credit rating?
Yes. The record of the IVA will remain on your credit file for six years from the date the IVA begins.
Will I still be able to get credit with an IVA?
Getting credit is harder with an IVA. If you want more than £500 of credit you’ll need permission from your insolvency practitioner in most circumstances. The chances of credit being approved are less, and any credit you are able to secure is likely to cost more.
Bear in mind, however, that an IVA (and a Scottish trust deed) is designed to help you escape debt, not find new sources of it.
If I choose an IVA, do I have to deal with my creditors directly?
No. In fact, you can’t set up an IVA without an insolvency practitioner who will handle all the to-ing and fro-ing between creditors. Assuming you qualify in other ways (see above) that makes an IVA ideal if you’d rather not speak to your creditors.
- Apply For An IVA
- Is An IVA Worth It?
- Are IVAs a Government Scheme?
- What If I Can’t Pay My IVA?
- Can I Get An IVA If I’m Self Employed?
- Rebuilding My Credit Rating After An IVA
- IVAs: What Will I Need To Show My Insolvency Practitioner?
- Who’s Most Likely to Need an IVA?
- How Much Does An IVA Cost?
- Can I Afford An IVA?
- IVAs – Can I Lose My Home?
- IVA And Trust Deeds | Whats The Difference?
- How Will My IVA Affect My Parents?
- An IVA Mythbuster
- Can An IVA Be Rejected?
Trust Deed Example
Example Unsecured Debts
|2||Credit card 1||£6,812|
Your Monthly Repayments Would Be
a Scottish Trust Deed £748
(total contractual repayments)
a Scottish Trust Deed £295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances. For more information on our fees click here