How does an IVA work?
If you’re considering an IVA, you should make sure that you understand exactly how and IVA works, how long it will last and what it is likely to cost you.
Don’t just take your IVA company’s word for it, do your own research to understand the arrangement before it starts. Once your IVA is approved it is often too late to ask questions, and the details cannot be altered.
How long does an IVA last?
IVAs are governed by a set of standard rules which are published by the Insolvency Service of England and Wales. These rules have changed over time. Most of the IVAs which are currently ‘live’ in the UK will be subject to the 2016 rules, although newer IVAs will now be governed by the 2021 Protocol; and other older arrangements may still follow the rules introduced in 2008.
These rules set out the details about the standard length of the IVA and the maximum term that the arrangement will run. The agreement between you and your creditors will say how long your IVA will last, and also the reasons that the term may be extended.
Typically, under the IVA agreement, you will be required to make payments to the arrangement for 5 years. But it is very important to realise that the length of the IVA can, and very often does, change. You may find that you are paying for may more years than you expected.
To illustrate how common this is, 1 in 16 IVAs which started in 2013 are still ongoing nearly 8 years later in 2021. And just under 40% of the IVAs arranged in 2015 were still live after 6 years.
There are several reasons why your IVA may last longer than you originally agreed, and unfortunately this is something which many people find they have no control over. It is one of the reasons that an IVA often becomes an expensive route out of debt.
Please keep in mind, that this is also outside of the control of your IVA supervisor, and they cannot at any time give you real assurance about how long the arrangement will last. Some of the most common reasons for extending an IVA are explained below.
Can an IVA be extended?
Often the term of an IVA will be based on you re-mortgaging your property in the final years of the arrangement.
The problem with planning to re-mortgage and release equity, is that once you are in a live IVA you are formally insolvent and will find it very hard to get a mortgagor to lend you money. Any mortgage you do find is unlikely to be at a competitive rate of interest.
If you fail to release equity from your property when this was a term of the arrangement, you will instead be asked to contribute up to 85% of the value of your equity into the IVA. This may be paid over an agreed period of time, and the IVA extended to cover these contributions.
The IVA may also be extended if you need a payment break at any time during the arrangement. The supervisor will often be happy to give you a break of between 3 and 9 months, but the IVA will be extended for up to 12 months every time you ask for an extension. This means the overall cost of the arrangement increases dramatically.
Similarly, the IVA may last longer if you cannot keep up with the increase in your monthly payments after an annual review, or if you fail to pay overtime, or other additional pay, to the IVA within 30 days.
Unfortunately, much of this is not explained when the IVA is proposed. Many people are sold into the IVA without realising how long they will be paying, or how little control they have over what they will be required to do.
How much does an IVA cost?
It is very difficult, and nearly impossible, to work out how much an IVA will cost. This is because neither the term of the arrangement, or the payments that you will be asked to make, are fixed.
Sadly, this is often misunderstood, and people in debt do not realise the true cost of the arrangement before they agree to be bound by it.
It is a typical experience that the payments in an IVA start very low, even as little as £90 each month, but then increase significantly year on year.
This is because the payment you make each month is set at an annual review by completing an income and expenditure report. You will then be told to pay any increase in your disposable income into the IVA.
If you refuse, the term of your IVA will be extended (so it will become more expensive in the long run) and the arrangement may even be cancelled.
It is therefore impossible to say how much an IVA will cost to complete, or how much you will save. Even if your available income remains stable, you will likely be asked to pay more and more each year with no guarantee of how long you will need to keep paying for.
How much does an IVA cost to set up?
Although there is no upfront cost to set up an IVA, there are several fees which will be taken from what you pay to the IVA. These include the supervisors fee, nominee fee and disbursements. Disbursements are costs which the supervisor has paid in relation to the IVA and can include payments for documents, credit report checks, IT software, annual reviews, phone calls, letters, taxes, document storage and fees to claims management companies.
The Nominee’s fee is the fee which is paid to the company who helped you set up the arrangement. This is usually the same person / company as the IVA supervisor. The nominee’s fee is generally between £800 and £3,000, but it can be higher.
The Supervisor’s fee is usually capped at around 15% of the expected payments to the IVA, but it can be much higher. The supervisor will usually also be entitled to charge an additional fee on any income over the expected payments, this is often as much as half of what you pay.
The IVA fees are set at the meeting of creditors when the IVA is set up. The proposal will include a section on fees which can either be accepted, rejected, or modified by the creditors.
The disbursements, or costs, are not monitored or capped and are often used to disguise the true cost of an IVA.
IVAs often pay the cost of claims management fees for PPI or package bank account fees. These fees are often higher than the maximum fees set by the FCA and are paid to companies who are either under the same ownership as the IVA company, or who pay high commissions to the IVA company to reward them for the referral of the work.
The proceeds of any successful claim will be paid into the IVA, and the supervisor will then charge an additional fee in respect of this amount.
In insolvency, fees can be extremely high. There is no effective cap on the fees charged, and little oversight by individuals or creditors. The IVA supervisor often charges fees of several thousand pounds, most of which is taken from your contributions to the arrangement before a penny is paid to the creditors.
This is certainly not against the rules and even makes sense in most insolvencies – the supervisor does not want to end up being owed money themselves. But it does mean that after the first year or two of the arrangement, the supervisor will be under pressure to recover money from you to distribute to the creditors.
Your payments are very likely to go up at this point.
When does an IVA end?
The IVA will end either when you have made all the required payments, or when the IVA is terminated.
If you make all the payments to the IVA then you will be discharged from the remaining debt, which means that any remaining debt will be written off.
If the IVA is terminated, then you will still owe the outstanding debt. That is regardless of when the IVA is terminated.
Is an IVA a good idea?
An IVA can be a good idea if you have no prospect of repaying your debt and you have a house with significant equity, or other assets. If you do not own your own home, an IVA is unlikely to be a good idea.
When you are in an IVA you have no control over what you will be required to pay and how long you will pay for. An IVA also has a big impact on other areas of your life such as your employment, your ability to get credit, renting property and even your immigration status. Other debt solutions either do not have the same impact, or last for a much shorter time.
If you are considering an IVA we would always recommend that you look very carefully at your other options before deciding whether this is the right option for you. Particularly bankruptcy, which is frequently overlooked as an alternative to an IVA.
Unfortunately, IVAs tend to be sold very aggressively by introducer firms who have no real experience or understanding of how IVAs work. These companies are paid very high fees by the IVA companies which means they are very persistent and insistent once you are on their hook. This means that there is very little incentive to find the right solution for you.
A recent report by the regulator of the insolvency industry revealed widespread malpractice in the IVA market, particularly in the way that individuals were sold into an IVA. In order to make the IVA as attractive as possible, they frequently manipulate income and expenditure figures to result in a low monthly payment for you. You may also have been coached about what to say to the IVA company once you have been introduced.
There are several reasons why this practice is having a severe and devastating impact on consumers entering an IVA.
First, although figures may well be manipulated at this stage, once the IVA is live, it is the supervisor’s job to get as much from you as possible, and future income reports are likely to be much more accurate, and less favourable.
What this means for many people, is that they must increase the payments that they are making to the IVA (sometimes by several hundred pounds each month); all without realising any real change in their circumstances or the money that they have available for their family. This is crippling and the supervisor is often unyielding in their demands.
If you find you cannot pay, either the IVA will be terminated, or you will need to pay for longer. And of course, you face the same battle each year.
Another reason for this increased cost at the end of year 1 or year 2, is likely to be the high fees charged for setting up and administering an IVA.