How does Individual Voluntary Arrangement help a debtor?

Are you on the verge of filing bankruptcy to clear your outstanding debts? You can think of Individual Voluntary Arrangement (IVA) as an alternative to bankruptcy. It is a legally binding agreement between you and your creditors; your creditors accept a reduced amount of the debt that you owe to them. Debtors in UK can take advantage of an IVA in order to repay their debts and avoid bankruptcy. IVA is usually administered by an insolvency practitioner.

Types of Individual Voluntary Arrangement

Usually, 2 types of Individual Voluntary Arrangement solutions are used as alternative to bankruptcy. Each of the 2 solutions is discussed below.

  1. Full and Final settlement – In this IVA settlement, you need to make a one-time payment to your creditors. Your creditors accept the amount as full and final settlement. It is also referred to as lump sum IVA.
  2. Standard IVA settlement – It is a type of debt solution where you need to make a fixed monthly payment for a period of 60 months. Each of your creditors should receive at least 25% of the outstanding debt amount.

However, your creditors may legitimately ask for both lump sum and monthly payments in certain circumstances.

Advantages of IVA

Apart from benefiting an individual, IVA is also advantageous for sole trader and partner. Following are the advantages of IVA to both debtor and creditor.

To the debtor:

  • No restrictions to apply for personal credit – There are no restrictions to obtain personal credit; however, it may be difficult for you to get credit when you’re filing an IVA.
  • Can continue trading – A partner or a sole trader can continue with his/her trade to generate income for debt repayment.

To the creditor:

  • Cost effective – Costs of administering IVA are much less as compared to bankruptcy; therefore, creditors get higher returns.
  • Reclaim VAT and tax relief – IVA is operated as an insolvency procedure; therefore, creditors can reclaim both VAT and tax relief as the outstanding balance is considered to be a bad debt.

In spite of these advantages, debtors may also have to experience certain negative consequences of Individual Voluntary Arrangement. If an individual is opting for an IVA, then his/her credit score gets reduced to some extent. However, the impact is much less in comparison to bankruptcy.