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How an IVA works

The first step with an Individual Voluntary Arrangement (IVA) is to make your proposal and have it accepted by creditors. Once it is approved, your Insolvency Practitioner (IP) will take on the role of Supervisor for the five year period. This will involve ensuring that the monies are handled correctly and that appropriate payments (or dividends) are made to the creditors.

Bank account

A new bank account is usually set up specifically for each individual IVA. Agreed payments are made into this account on a monthly basis, via standing order or direct debit. The account is set up and controlled entirely by the IP, helping him/her to keep the funds separate from other IVAs and simplifying payments in and out. The IP will check each month that the correct amount of funds have been paid into the account. It is very important to keep up payments into the IVA once it has been approved.

Lump sum payments

If your IVA includes a lump sum payment it will be made on a specified date, for example 3-6 months after the approval of the IVA. As with regular payments, the lump sum goes to the IP and it is worth contacting your IP to discuss how the payment should be made.

Missed payments

It is important to adhere to an IVA's terms or you risk bankruptcy. Many IVAs specify that if three payments are made late, this will count as a default on the IVA. These three payments do not have to be consecutive: they could happen at any stage during the IVA. You'll need to contact the IP urgently if there is difficulty making any payment.

Periodic income checks: the quarterly payslip review

An IP will check your income on a regular basis, typically once a year. That may mean sending through a copy of your payslip each month, or the IP may review payslips every three to six months. This exercise ensures that IVA payments are affordable, and checks whether the amount needs to be increased or decreased.

If your monthly income increases significantly, you may have to make a higher payment – often only 50% of the increase in net income. For example, an increase in monthly income of £150 might mean that the IP requests an extra £75 to be paid into the IVA each month.

Annual review

Annual reviews are also standard. This includes a run through of your income and expenditure with supporting evidence, similar to the fact finding exercise when setting up the IVA. Many people find this is a useful process and ClearStart uses the opportunity to help you make a financial health check, including thinking about your wider financial future.

Changes of circumstances

Circumstances can change over the five year period of an IVA. For example, you might have income difficulties due to an accident or redundancy, or you might separate or have more children. Changes like these should be discussed with the IP as it is common for a variation to an IVA to be made. That may involve the IP meeting with creditors. Although there is no guarantee of a change, the success rate exceeds 90%.

Paying off an IVA early

If you come into some money for some reason, you might want to settle the IVA early. This is known as 'Full and Final Settlement'. Early settlement of this kind requires paying off the whole original debt, or sometimes a major proportion of it. Otherwise your creditors will want a proportion of the lump sum and to continue with the IVA. Your IP can advise.

Windfalls, bonuses and pay rises

If your financial circumstances significantly improve during the IVA, creditors will often require that 50% of the extra money is contributed to the IVA. The exception to this is if the amount is enough to propose a full and final settlement, and so terminate the IVA early.

Payments to creditors

At the end of each year after the IVA begins, the IP will assess what funds are available in the bank account. If there are sufficient funds, the IP will make a payout to the creditors (a 'dividend'). Money is divided according to how much each creditor was owed originally.

At the end of an IVA

At the end of the five year period, assuming that the IVA has been satisfactorily completed, there is final dividend payment made to the creditors and the IVA is closed down. Monthly payments stop, the bank account is closed any all parties are told of successful completion. ClearStart is able to offer further help planning finances if required. In particular, advice on how to start saving or contributing to a pension scheme is often valuable.

Further Reading:
IVA Help | How an IVA works | IVA Costs | IVA Criteria | IVA Approval Process | How to Start IVA | What Is an IVA?

Three steps to a better future

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