IVA Failure: What Happens If Your IVA Fails?

If you’re facing financial difficulties and your Individual Voluntary Arrangement (IVA) is at risk of failing, it’s important to understand what this means for your financial future. An IVA is a formal agreement with your creditors to pay back a percentage of your debt over a fixed period, typically five years. However, not all IVAs are successful. Here’s what you need to know if your IVA fails.

What Happens When an IVA Fails?

When an IVA fails, it means that the agreement you had with your creditors has broken down. This could be due to missed payments, a change in financial circumstances, or an inability to meet the terms of the agreement. The consequences of an IVA failure can be serious, and you may find yourself facing creditor action, such as court proceedings or bankruptcy.

Immediate Effects of IVA Failure

If your IVA fails, your creditors may remove the protection that was provided by the IVA. This means they are free to pursue other methods of debt recovery, such as taking legal action or demanding full repayment of the outstanding debt. For instance, if you’ve missed several payments due to an unexpected job loss, creditors might immediately start to contact you for repayment, potentially leading to significant stress and anxiety.

Additionally, the failure of an IVA can lead to an increase in your debt if creditors decide to impose additional interest or charges. This can exacerbate your financial situation, making it even more challenging to get back on track.

Possible Outcomes

• Creditor Action: Creditors may start or resume legal action against you to recover the debts. This can include obtaining a County Court Judgment (CCJ), which could lead to enforcement actions like bailiff visits or attachment of earnings orders.
• Bankruptcy: Your insolvency practitioner might petition for your bankruptcy if no alternative solution is found. Bankruptcy can lead to the sale of assets to repay creditors, and while it may seem daunting, it can also provide a fresh start once discharged.
• Debt Management Plan: You may consider a Debt Management Plan (DMP) if creditors agree. However, this is not legally binding, and interest may continue to accrue. A DMP can be a viable option if you have a steady income and can make regular payments, but it often extends the repayment period significantly.

Alternatives to IVA

If your IVA is at risk of failing, consider alternative debt solutions. Each has different implications and suitability depending on your circumstances.

Debt Relief Order (DRO)

A DRO might be an option if you have low income and few assets. The current criteria for a DRO include:

• Maximum debt of £50,000
• Spare income less than £75/month
• Assets under £2,000
• Vehicle not worth more than £4,000
• Cannot own a home

A DRO lasts 12 months, after which your debts are written off. It’s important to note that you must apply through an approved debt adviser, and you cannot apply for a DRO if you have had one in the last six years. For example, if you are working part-time and struggling to cover basic living expenses, a DRO might provide the necessary relief and allow you to reset your financial situation.

Bankruptcy

Bankruptcy might be a suitable option if you cannot pay back your debts and have significant liabilities. The cost of applying for bankruptcy is £680, and it typically lasts 12 months. However, if you own a home, any equity in the property is at risk of being used to pay your debts. Bankruptcy can be a daunting prospect, but for some, it represents a clear path to financial recovery. It’s essential to weigh the pros and cons and consult with a financial advisor to understand the full implications.

Understanding the IVA Process

Before committing to an IVA, it’s crucial to understand the process and how it works. An IVA requires 75% by value of your creditors to approve the agreement, and it is legally binding on all unsecured creditors once approved. Managed by a licensed Insolvency Practitioner, the IVA fees are taken from your monthly payments, not charged on top. If you’re a homeowner, you may be required to release equity in the final year of the IVA.

The IVA process begins with a detailed assessment of your financial situation, including income, expenses, and debts. This assessment helps determine the monthly payment amount that you can afford. Once an IVA proposal is drafted, it is presented to creditors for approval. If approved, the IVA becomes a legally binding agreement, and you must adhere to its terms throughout the duration, typically five years.

Steps to Take If Your IVA is Failing

If you find yourself struggling to meet the terms of your IVA, take the following steps:

1. Contact Your Insolvency Practitioner: Inform them of your situation immediately. They may be able to negotiate new terms with your creditors. Open communication is crucial, as your insolvency practitioner can often provide solutions that you may not have considered.
2. Review Your Finances: Assess your income and outgoings to see if there are any areas where you can cut back. Consider creating a detailed budget to identify unnecessary expenses and allocate funds more effectively.
3. Seek Professional Advice: Contact a debt adviser to explore other debt solutions and find the best option for you. A debt adviser can provide insights into alternative options like DMPs, DROs, or bankruptcy, depending on your unique circumstances.

IVA vs. DMP: A Comparison

Choosing between an IVA and a Debt Management Plan (DMP) depends on your financial situation. An IVA is legally binding and can write off a portion of your debt, whereas a DMP is informal and requires full repayment of your debts. Creditors in a DMP are not obliged to freeze interest or charges, which can prolong the repayment period.

For example, if you owe £30,000 and have a steady income, an IVA might allow you to pay back £15,000 over five years, with the remaining debt written off at the end. In contrast, a DMP would require you to pay back the full £30,000, potentially taking longer and costing more due to accrued interest. It’s important to consider factors such as the total debt amount, your income stability, and your long-term financial goals when making this decision.

Long-Term Implications of IVA Failure

The failure of an IVA doesn’t just have immediate financial consequences; it can also impact your long-term financial health and future credit prospects. An IVA failure is recorded on your credit file and can remain there for up to six years from the date the IVA was approved. This negative mark can significantly affect your ability to obtain credit, including loans, credit cards, and mortgages.

Additionally, the stress and anxiety associated with dealing with creditors and potential legal actions can take a toll on your mental health and well-being. It’s essential to seek support from financial advisors, counsellors, or support groups to manage the emotional impact and find a path forward.

Despite these challenges, it’s important to remember that financial recovery is possible. By taking proactive steps, seeking professional advice, and exploring alternative solutions, you can regain control of your finances and work towards a more stable financial future.

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