What Is an IVA and How Does It Work?

An Individual Voluntary Arrangement is a formal agreement between you and the people you owe money to. You propose to repay what you can afford over a fixed period — usually five or six years — and at the end, any remaining unsecured debt is written off. The arrangement is legally binding once your creditors vote to accept it, which means they can no longer chase you for payment or add interest. ABC Vac Sweep explains how an IVA works, what it asks of you, and whether it fits your situation.

How does an Individual Voluntary Arrangement work?

You work with a licensed insolvency practitioner to draw up a proposal. The proposal sets out how much you can afford to pay each month based on your income and essential living costs. Your creditors receive a copy and vote on whether to accept it. If creditors holding at least three-quarters of your total debt by value agree, the arrangement binds everyone — even those who voted against it.

Once approved, you make one monthly payment to your insolvency practitioner. They distribute the money to your creditors according to the agreement. The arrangement usually runs for five years, though it can be longer if you own property. At the end, provided you've kept to the terms, any debt still owed under the IVA is written off.

Your insolvency practitioner charges fees. These come out of your monthly payments, so you don't pay them separately. The fees are set at the start and agreed by your creditors as part of the proposal.

Who can apply for one?

You can propose an IVA if you live in England, Wales or Northern Ireland and owe at least one creditor. There's no minimum debt level in law, but insolvency practitioners usually only take on cases where unsecured debts total several thousand pounds, because the cost of running the arrangement needs to be proportionate.

You must have a regular income — from work, benefits, or a pension — because the arrangement depends on consistent monthly payments. If your income is too low to make meaningful payments after covering essentials, an IVA may not be workable.

Calculate what you can afford to pay

An insolvency practitioner will ask for details of your income and spending. Your monthly payment is what's left after you've covered priority debts and reasonable living costs. Priority debts include rent, mortgage, council tax, gas, electricity, and any court fines. You pay these in full before anything goes into the IVA.

Living costs are what you need for food, transport, clothing, and household bills. Your practitioner uses standard allowances for these, which are usually close to what people in your situation spend. You can't include non-essentials like holidays or gym memberships, but the figures do cover school costs, basic phone and internet, and a modest amount for repairs and replacements.

Once those costs are taken off, the remainder becomes your IVA payment. If your income rises or falls during the arrangement, your payment can be reviewed and adjusted.

Steps to set up an Individual Voluntary Arrangement

1. Speak to a licensed insolvency practitioner. They'll review your debts, income and spending to see if an IVA is suitable. This initial conversation is usually free.
2. Provide proof of your finances. You'll need recent payslips or benefit statements, bank statements, and details of what you owe and to whom.
3. Agree the proposal. The practitioner drafts a document setting out how much you'll pay, for how long, and what happens at the end. You sign it before it goes to your creditors.
4. Wait for the creditors' decision. They have a set period to vote. If the proposal is accepted, the arrangement becomes legally binding within a few weeks.
5. Start making payments. Your first payment is usually due within a few weeks of approval. Payments continue on the same date each month until the term ends.

What your creditors consider

Creditors compare what they'll receive under the IVA with what they'd get if you went bankrupt instead. If the IVA offers them more, they're likely to vote yes. They also look at whether the proposal is realistic — whether your income is stable and your living costs are reasonable.

If creditors reject the proposal, you can revise it and ask them to vote again. Common reasons for rejection include a payment offer that's too low or unclear information about your finances.

Know your obligations during the arrangement

You must make every payment on time. Missing payments without agreement can lead to the IVA failing, which puts you back where you started — except your creditors will know exactly what you earn and own.

You're required to tell your insolvency practitioner if your circumstances change. A pay rise, a new job, redundancy, or a lump sum like an inheritance all need to be reported. Windfalls and bonuses may have to go into the arrangement. If you move house or change bank account, that needs reporting too.

You can't borrow more than a small amount without permission. The limit is usually set in your IVA terms, often around a few hundred pounds. Taking out credit above that without approval breaks the agreement.

Understand what happens to your home and assets

If you own your home, you may be asked to try to release equity in the final year of the IVA. This usually means remortgaging or getting a secured loan, if a lender will agree to it. If you can't release equity, your IVA term is often extended by a further year instead.

You can keep your car if you need it for work or essential travel and its value is reasonable. A vehicle worth more than a basic runabout may need to be sold and replaced with something cheaper, with the difference going to creditors.

Other assets — savings, investments, valuable belongings — may need to be included in the proposal. Your insolvency practitioner will discuss this when drawing up the terms. Everyday household items are not counted.

What about joint debts?

An IVA only covers your share of a joint debt. The other person remains fully liable for the whole amount. If you have a joint loan or credit card with a partner or family member, they'll still be chased for the full debt unless they make their own arrangement.

If you have a joint bank account, you should open a sole account before the IVA begins. Creditors can sometimes freeze joint accounts if one account holder enters insolvency, which affects the other person.

Recognise the impact on your credit record

An IVA appears on your credit file for six years from the date it starts. Lenders can see it when you apply for credit, and most will refuse you or offer only high-interest products while it's showing. Even after it drops off your file, some lenders ask if you've ever had an IVA, and you must answer honestly.

Once the arrangement is complete and removed from your file, your credit score begins to recover. How quickly depends on your financial behaviour after that — keeping up with bills, staying within overdraft limits, and not missing payments all help.

During the IVA, getting a mortgage is very difficult. Some specialist lenders will consider you, but rates are higher and deposits larger. Most people wait until the arrangement is finished and the record has cleared before applying.

Know when an Individual Voluntary Arrangement might not fit

If your income is irregular or you're self-employed with fluctuating earnings, predicting what you can pay is harder. Some insolvency practitioners will still take you on, but the arrangement may include a clause allowing payments to vary, which creditors don't always accept.

If most of your debt is priority debt — rent arrears, council tax, utilities — an IVA won't help. It only covers unsecured debts like credit cards, loans, and overdrafts. Priority debts must be paid in full outside the arrangement, and if they take up all your spare income, there's nothing left for the IVA.

An IVA also won't suit you if you can't commit to five years of payments. Life changes, but if you know you're planning to move abroad, retire on a much lower income, or take time out of work, the arrangement could fail partway through.

Find support if gambling has contributed to debt

If gambling harm has played a part in your financial situation, help is available before, during or after an IVA. GamCare offers free, confidential support through its National Gambling Helpline on 0808 8020 133, available around the clock. BeGambleAware at https://www.begambleaware.org provides information and links to treatment services.

GamStop, a free national self-exclusion scheme at https://www.gamstop.co.uk, blocks access to gambling sites licensed in Great Britain. Blocking software such as Gamban (https://gamban.com, paid) or BetBlocker (https://betblocker.org, free) works across devices and can stop urges before they turn into spending.

Gordon Moody at https://www.gordonmoody.org.uk provides residential and online treatment for gambling problems. Parental-control software like Net Nanny or Qustodio can protect younger people on shared devices. Gambling is for those aged 18 and over.

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