Updated: 29th January 2020
An Individual Voluntary Arrangement (IVA) is a common debt recovery process in England, Scotland and Wales. It offers a number of benefits to those trying to escape unmanageable debt, but IVAs aren’t the only answer available to people experiencing serious creditor pressure.
A number of other personal debt programmes exist, and depending on individual circumstances, may provide the breathing space needed to pay back debts in full, or at least a pre-agreed proportion, with the remainder often being written off.
Before we look at these alternatives, however, what makes an IVA such a popular method of dealing with debt?
An Individual Voluntary Arrangement is designed to help individuals deal with serious debt, and on its introduction in 1986, it was heralded as an alternative to bankruptcy. A key benefit of this procedure is that it freezes all interest and charges on the debt, and prevents further escalation of the debtor’s poor financial position.
Creditors are also unable to take legal action whilst the agreement is in place, as long as the debtor abides by all its terms and conditions. Generally lasting for five years, an Individual Voluntary Arrangement may require equity to be released if the debtor is a property-owner – if not, repayments will typically need to continue for a further 12 months.
So with these points in mind, what other personal debt programmes might be available, and how do they compare with the Individual Voluntary Arrangement?
Unlike an IVA, a debt management plan isn’t legally binding. A DMP provider negotiates with creditors for affordable repayments to be made from the debtor’s disposable income, and creditors are repaid in proportion to the size of their debt.
Information about the debtor’s financial situation, including monthly income and expenditure details, is presented to creditors in a proposal document.
Bankruptcy involves a debtor handing over control of all their assets, including property, to the trustee appointed to administer the process. The trustee then sells these assets to repay creditors.
As far as property is concerned, there may be some instances where a sale isn’t financially worthwhile – if little or no equity exists in the property for example, and to do so would incur excessive costs.
Bankruptcy generally lasts for 12 months, after which time the individual is discharged, but they may be required to contribute further if they have residual income – typically for up to three years, via an Income Payments Arrangement (IPA).
Debt Relief Orders are generally aimed at people who own few assets, have little or no disposable income, and owe under £20,000. They provide a respite from creditor pressure, in that creditors have to go through the courts if they want to take legal action to recover their debt whilst the DRO is in place.
A debt relief order lasts for 12 months, during which time the debtor makes no payments towards their unsecured debt. If their circumstances remain the same after this length of time, the debts are written off.
If a debtor has a County Court Judgment (CCJ) against them and they can’t afford to pay, an Administration Order allows for a single repayment, calculated after all essential living expenses have been covered, to be made towards their debts. Money must be owed to at least two creditors, and the total amount of debt must not exceed £5,000 for an individual to be eligible for this personal debt programme.
A debt consolidation loan, although not a formal debt programme, can help a debtor to regain control of their finances. Multiple debts are consolidated into a single loan, and affordable repayments made over a longer period of time.
Consideration needs to be given to the type of consolidation loan that is taken out, however, as if the lender wants to secure it against property, it places the debtor’s home at risk. The debt programmes mentioned above may also be more suitable if it’s likely that the debtor will want to seek further borrowing during the term of the consolidation loan.
If you would like more detailed information about these processes and personal debt programmes, contact one of the team at Begbies Traynor. We work from over 70 offices around the UK, and can offer a same-day meeting free-of-charge.