The Beginner's Guide to Individual Voluntary Arrangements

Successful financial management requires a stealth hand and in many situations, individuals, families and businesses encounter trouble managing mounting debt. In the United Kingdom, the Insolvency Act of 1986 enforced several important legal implications related to corporate and personal debt. Insolvency, or the inability to meet financial obligations, can cause a range of problems that affect the family or business unit. Consequently, the Insolvency Act established an alternative means of debt restructuring called the Individual Voluntary Arrangement, which addresses debts faced by individuals.

What Is an Individual Voluntary Arrangement?

This legally binding process provides relief for people facing bankruptcy. Essentially, an IVA's purpose is to establish and enforce a contractual agreement with an individual's lenders. One of the benefits provided by an IVA is flexibility: The IVA addresses a person's financial circumstances and permits multiple ways to resolve the debt.
Part VIII of the Insolvency Act establishes several guidelines for creditors. The debtor must submit a request to the court that includes a proposal designed to satisfy each relevant debt. The court can prevent levies against an individual's property and the filing of a bankruptcy petition, among other things.

What Are the Pros and Cons of Individual Voluntary Arrangements?

People facing bankruptcy and other financial problems live with a range of stressful and counterproductive conditions. For example, bankruptcy can severely damage an individual's credit rating and prevent access to jobs, homes and standard financial services. This process delivers a range of positive and negative consequences.

For example, the arrangement lasts for a fixed period, usually up to five years. Consequently, people who enter into an agreement achieve financial freedom within five years, depending on the amount of debt. Once the agreement is established, lenders cannot increase interest rates or request additional late payment fees. Furthermore, lenders can no longer file petitions with the courts in order to pursue the debt; the arrangement presents a legally binding document that creditors must honor.

The negative concerns associated with the IVA include debt levels, credit ratings and the ability to request loans. In order to establish the arrangement, a person must meet the minimum level of debt, which is unsecured debt of £15,000. Participants must also have a minimum of £170 of monthly disposable income. While the agreement provides the opportunity to avoid a severely damaged credit rating, credit will still undergo a negative impact. Furthermore, individuals cannot request unsecured loans during the five-year period. Finally, the agreement might cost more money than going through a bankruptcy.

How Does the Process Work?

Once an individual meets the minimum eligibility requirements, including the amount of debt and disposable income, she can contact an insolvency practitioner to begin the process. The law requires that individuals work with an insolvency practitioner. The practitioner offers sound advice, reviews an individual's financial situation, advises an individual about various options and manages the agreement over the specified period. In order to start an agreement, the practitioner will send an Interim Order to the appropriate court, which will stop creditor collection activities. Once the court establishes the Interim Order, the debtor should develop a proposal that explains, in detail, how he will repay each debt. Once the court receives the proposal, the lenders will establish a meeting date. The meeting is designed to allow the lenders to vote on the debtor's proposal. In order for the agreement to pass, the creditors who the debtor owes at least 75% of the debt must agree that the proposal is acceptable.

How Does the Process Diminish Debt?

The agreement provides debtors with an alternative to bankruptcy, which can have a heavier financial toll. People with the financial means, such as a steady income, to repay their debts in a timely manner can achieve debt-free status as long as they make their monthly payments on time. Consequently, the IVA's ability to prevent creditors from executing further collection efforts and the legally binding nature of the agreement can deliver many people from debt through a structured approach. Working with a professional practitioner reveals additional options. 


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