How much debt do I need to qualify for an IVA?

7 April2009

In 2008, the Insolvency Service website shows, around 40,000 people in England and Wales entered into an IVA (Individual Voluntary Arrangement).

An IVA is a legally binding debt solution that can allow borrowers to reduce the size of their monthly unsecured debt repayments, protect themselves against legal action by their lenders (including the threat of bankruptcy) and - assuming the IVA is successfully completed - write off their outstanding unsecured debt.

However, an IVA is only an option for people who cannot afford to maintain their monthly payments to their unsecured creditors. Plus, it will appear on their credit rating for six years, potentially making it harder for them to obtain credit - and if they`re a homeowner they would be required to release equity from their property in the final year of the IVA.

IVA - how it works

An IVA isn`t an option for everyone. In general, IVAs are only suitable for people who owe at least 15,000 to various unsecured creditors, and who can`t reasonably expect to repay this debt in a reasonable period of time.

And that isn`t the only factor. The borrower`s Insolvency Practitioner (IP) won`t even suggest an IVA unless it`s clearly the best option. They`ll work with the borrower to check a few important points, making sure that:

  • The borrower can afford to make regular monthly payments to their IVA, based on what they can afford after they`ve accounted for their essential expenditure (mortgage/rent, utility bills, petrol, etc.).
  • They`re capable of maintaining those payments for the duration of the IVA - which means five years, in most cases.
  • They`re not expecting any major change in their circumstance which could prevent them from fulfilling their side of the agreement.

If the IP has any significant doubts about any of these areas, they`ll advise the borrower that an IVA isn`t right for them. Since it would be unlikely to succeed, it wouldn`t be in anyone`s interest to even try to go ahead with the IVA.

But if the IP is satisfied on all these counts, they may decide that an IVA is a realistic option. They can then work with the borrower to put together an IVA Proposal that shows lenders how they would repay their debts if the IVA went ahead.

The IVA can`t go ahead unless 75% of the creditors by debt value (i.e. creditors who `own` 75% of the debt between them) agree to that Proposal. This means they`ll have to be satisfied that the IVA is likely to work out, and that they`ll receive more by agreeing to it than they would if they `pushed` for an alternative, such as bankruptcy.

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