Entering into an IVA agreement is not something to be taken lightly. Although it can help you enormously to sort out a financial crisis, the consequences could be catastrophic if you should fail to keep to the terms and conditions of the IVA.
An IVA is put into place when a person has a significant amount of debt that they cannot pay back within the agreed time. They employ an Insolvency Practitioner to act on their behalf to put together a payment proposal to their various creditors that they can more realistically afford. If the creditors accept the proposal then the debtor would then make one monthly payment to the Insolvency Practitioner, who would then disperse this accordingly amongst the creditors. With the IVA in place, the creditors cannot add interest or charges onto the debt, nor can they contact the debtor about it. If the IVA is successfully completed then any remaining debt is written off and the account is seen to be fully paid.
If, however, the debtor does not stick to the terms set forth by their creditors then there may be serious repercussions. A failed IVA is the breaking of a legally binding agreement, and therefore is privy to all the repercussions of a broken legal agreement. Potentially, the agreement that the debtor came to with their creditors could be revoked and the interest and charges that had been on hold could be reinstated.
Sometimes the reason for an IVA running into problems is completely beyond a person’s control. Any number of unforeseeable factors could contribute to a drop in income that would make it difficult to meet your financial obligations. This may include;
Reduced hours at work
An accident meaning long-term sickness
Becoming a full-time carer for someone
In light of these situations, your creditors are far more likely to be sympathetic to your position than someone who has not stuck to the arrangement for no good reason. As was the case when the IVA was first applied for, the key to resolving the situation is negotiation.
If you miss a payment you will normally receive a notice of breach from the Insolvency Practitioner. It is in your interests to make the payment as soon as possible, although most IVAs are surprisingly lenient and give you three months to respond to the notice. If the payment is fulfilled within this time period then no further IP action is necessary. If the matter is more serious and you are struggling on a regular basis to make your payment then you must contact your Insolvency Practitioner as soon as you can. There are two different possible scenarios here;
Short-term financial problems
Your IP may agree to a payment break if something happens which means that you will be temporarily worse-off than usual. For example, if there is an issue with work paying you incorrectly or if your freezer needs replacing. If they agree to this you will have to provide evidence such as bank statements and receipts, to prove that you are telling the truth. Payment breaks can vary in length depending on when the IVA was set up. This can be anywhere between six and nine months but will increase the length of time that you pay the IVA for.
Long-term financial problems
If your income has taken a downward turn and shows no signs of improving then you need to let your IP know immediately. They have the power to reduce your payments by 15% without asking for the permission of your creditors. If you need to reduce your payment by more than 15% then your IP will have appeal to your creditors again with a new offer. They are under no obligation to accept this new offer and if you continue to miss payments then you will have to look for an alternative way to pay for the IVA
IVA Breach of Contract
There are eight different ways in which a person could be considered in breach of their IVA contract. These are;
Falling into three months worth of arrears
Not following the IPs instructions
Not paying in any money that you make from selling assets
Not paying in more if you earn more money
Not letting the IP know when you have borrowed over £500
Not declaring windfalls such as inheritance to the IP
Withholding information at your annual review
If your IVA failed due to one of the last six factors then you would find that your creditors would be largely unsympathetic towards you. If, however, the first two factors are due to circumstances beyond your control then you would find that they are much more lenient. An IVA will not automatically shut down with just one missed payment - you will be given ample opportunity to speak to your IP and discuss your situation. If you think you will be in breach of contract then the sooner you speak to them the sooner they can try and put something in place to help. They may be able to alter the terms of your IVA to reflect your new circumstances, or arrange for a payment holiday giving you the chance to get back on your feet again.
What Happens if my IVA is Terminated?
If for whatever reason you let an IVA get to the point where it may be terminated then you need to know what that might mean. What happens if my IVA is terminated?
Your IP will write to your creditors with a letter of termination. They will also include a Failure Report, which is as dramatic as it sounds. It lists:
What payments have actually been made up until that point
All of the creditors named in the IVA and how much they were originally owed
The amount that each creditor has received thus far
How much is outstanding to each creditor
A list of their own personal fees
This transparency marks the beginning of the end of your association with the IVA and the IP. The biggest thing that happens now is that the debts that you have are no longer be protected by the terms of the IVA. This means that your IP can no longer help you and it’s up to you to satisfy your creditors. In addition to this, your creditors may collectively petition for your bankruptcy
Consequences Breaching IVA
The consequences of breaching an IVA can be far-reaching and extremely serious. To be clear, a breach does not mean that the IVA will just shut down - you normally have to miss three months payments before this happens. Your Insolvency Practitioner is bound by law to send you a Notice of Breach, which is a letter acknowledging that a payment or payments have been missed. You normally get up to a month to rectify this but can have as much as three months depending on the leniency of your IP. If the shortfall is paid back within this time period then no further action will be taken.
If the situation does arise where the IVA has been continually breached then the IP will issue a Certificate of Termination. At this point the IVA will no longer be in place and the terms and conditions of it will be forfeited. In essence this means that;
Your creditors can start contacting you again
You may be liable for interest charges that have been put on hold
You may be liable for any additional charges your creditors wish to add on
Your creditors could demand that you pay your debt to them IMMEDIATELY and in full
Your creditors could petition for your bankruptcy
Your credit file will reflect that you have failed at an attempt to successfully manage your finances and you will find it incredibly hard to find another debt restructuring package
In short, it can cause a huge financial mess. If you do commit a minor breach such as missing a payment due to unforeseen circumstances then your IP should be understanding. If you commit a serious breach then you will find that forms of help will be very hard to come by and bankruptcy may be your only remaining option.
Defaulting on an IVA
Defaulting tends to be a blanket term with negative connotations. Although defaulting on any financial agreement is serious, when it comes to defaulting on an IVA there are various different levels of seriousness all covered by this one term.
Notice of Breach - This is an official letter sent to you by your Insolvency Practitioner. This will be sent regardless of whether you have missed one payment or several. It is the Insolvency Practitioner’s way of displaying to the creditors that they are being responsible when it comes to dealing with the IVA. You normally have one month to respond to a Notice of Breach. At this point the IVA is still very much active and the problem can be rectified with little fuss.
Certificate of Termination - This is as serious as it sounds. If you fail to keep to the terms and conditions of the IVA you will be issued with a Certificate of Termination. This means that you have seriously defaulted on your agreement and it is being closed down. An IVA that has failed means that the IP will no longer represent you and it is up to you to sort out your finances. If a Certificate of Termination is issued, you will have to find an alternative source to finance your debts.
Failure Report - This is issued to your creditors at the same time as the Certificate of Termination is issued to you. It details everything from the original amount that was owed, how much has been paid, and how much is still outstanding. Your creditors will know exactly how much is owed to them and they are within their rights to ask for it in full, straight away.
Defaulting on any financial agreement that you have entered into will seriously affect your credit file. Under the terms of an IVA you are not allowed to borrow more than £500 without the permission of the IP, even from family and friends. Defaulting on an IVA could extend this inability to borrow even further as potential lenders will see you as a huge risk. If you do manage to attain credit elsewhere the chances are that the APR rate will be astronomical and you stand a very good chance of being in a worse position than when you first started.
IVA Failed after 3 Years
There has been a disturbing trend recently in the rising amount of IVAs that have failed. More than a quarter of IVAs now fail so it’s important to know what will happen if this does happen to you. IVAs typically last for sixty months but can run for longer depending on the amount owed and whether payment breaks or minor defaults have taken place. If your IVA has failed after 3 years then what can you expect the repercussions to be?
If the IVA had a standard time period of five years then you will have already paid about half of your debts back. In addition to the debt that is still owed, the creditors are within their rights to cover their losses by adding on additional charges. For example, the Insolvency Practitioner will recover their own fees from the creditors so you should expect to be paying for this too.
Because the Insolvency Practitioner is now out of the picture and the debts are no longer covered by the protection that an IVA offers, you will have to find an alternative way to pay off these debts. This may lead you to have to apply for a loan, asking friends or relatives to contribute financial help or even considering bankruptcy.
IVA Failed after 4 Years
If your IVA failed after 4 years then your options remain fairly unchanged. Your credit report will reflect the fact that you failed to keep to the terms and conditions of the IVA and this will further damage your credit score for an additional 6 years. This will prove problematic if you are trying to raise funds via loans to pay for your debts because you will be perceived to be a liability to creditors.
Your creditors could actively pursue filing to make you bankrupt if you are unable to come up with a way to pay back the debts. If your creditors don’t do this then you may have to seriously consider it yourself. Bankruptcy may see you having to sell off assets such as your home and will also stay on your credit report for six years.
IVA Failed after 5 Years
If your IVA failed after 5 years and was supposed to run over the standard 60 months, then the majority of your debts may be almost paid off. However, what you need to realise is that the IVA was keeping you protected against additional charges and interest. As soon as that fails you are liable for these sorts of additions again. So while your debts may be nearing completion, the addition of various charges, administrative costs and penalties may mean that figure once again creeps up into something that isn’t manageable.
You could try to speak to your creditors and see if you can come to an arrangement but the chances are they won’t be too willing to help. Having agreed to one form of debt restructuring with the IVA and watched that fail, they are unlikely to want to offer an olive branch again any time soon. If you are unable to secure alternative funding this effectively leaves you with asking friends and family to help out or applying for bankruptcy.
IVA Failed after 6 Years
IVAs usually last for five years, but an extra year can be added on for those people who have a house with equity but are not in the position to be able to remortgage. If your IVA has failed after 6 years then it should be near the end of its life span anyway. If this is the case then it would be worth contacting the various creditors to see how much is owed to each of them. You may be able to come to an agreement with them and be able to pay the remaining balance to them directly. Another option may be contacting the creditors and finding out how much is owed, then applying for a consolidation loan to pay them off. Because you are no longer bound by the terms of the IVA you are free to borrow money again, so you could potentially settle the debts this way.
Regardless of how far into an IVA you may be before it fails, it will be reported to the credit companies and stay on your credit file. In most instances this will be for six years and will have a seriously damaging effect on your ability to get credit. Filing for bankruptcy as an alternate way to fund your debts may mean selling your home, vehicles personal belongings and forfeiting any savings you have.
Dealing with Creditors after a Failed IVA
You will find that dealing with creditors after a failed IVA to be an unpleasant experience. From a creditors point of view you are not to be trusted with their money as it is the second time that you have failed to keep to your financial agreements. You didn’t keep to your original agreement which is why you needed an IVA, and you also let the IVA get beyond your control, so be prepared for a frosty reception.
That being said, your creditors should be the first people you should speak to. Don’t expect them to lay out the red carpet for you but there is a chance that they might still be willing to cooperate with you and the reason for this is very simple; if you go bankrupt there is considerable chance that they end up with nothing. If they negotiate with you then the possibility of not making a complete loss remains open. Be cautious, be humble, but don’t just agree with anything they put forward to you just for the sake of having something in place.
Can I Legally Cancel my IVA??
Circumstances can change within the blink of an eye and you may find that you are in a position where you don’t want the hassle of dealing with it anymore, or having an IVA might not be necessary any longer. With so many pitfalls regarding bad credit ratings though, you might wonder Can I legally cancel my IVA, or will it complicate things further?
It’s a fair question. The short answer is Yes, you can. A word of caution though, there are important things to consider before you do;
If you still owe money to your creditors then cancellation must be approved by your Insolvency Practitioner first
If you go against the advice of your Insolvency Practitioner and cancel the IVA while you still owe the debts, you will have to find an alternate way of funding them. Creditors are well within their rights to ask for the full amount immediately.
You still have to pay your Insolvency Practitioner fee
Cancelling an IVA will mean that interest and charges on the debts will no longer be frozen
You may be liable for new administrative costs on top of what you already owe
It will further damage your credit score
IVA Breach of Contract
An IVA is a legally binding financial agreement and any failure to meet it will be seen as a breach of contract. It is in your own interests to maintain a good working relationship with your Insolvency Practitioner, particularly if this situation should arise.
If you know your payment will be late due to an unforeseen difficulty then you must let your IP know as soon as you can. They can either allow you more time to pay or can implement a payment holiday to help you out. If your circumstances change where you know you won’t be able to make your payments on a regular basis, and therefore will be in breach of contract, again you must speak to your IP. As well as having the power to reduce your payments by 15% without consulting your creditors first, they can also try to negotiate for reduced payments with them if the inability to pay the current amount is likely to be long term.
Serious breaches of contract could cause the IVA to fail. If this happens then the prospect of bankruptcy becomes increasingly real because you will find it nearly impossible to find a creditor who is willing to take a chance on lending you money.
Failure of an Individual Voluntary Arrangement
The failure of an Individual Voluntary Arrangement can be caused by any number of factors. The most common factor is a person’s personal circumstances changing to the point where they don’t physically have the money to pay for what they agreed to. This may be due to redundancy, long term health issues, the loss of a partner’s income, other creditors taking money from a benefit that was being used to pay the IVA and so on.
Of course, the other more unusual circumstance is that a person may decide they no longer want to be in an IVA. This could be because they have enough money to pay off the debts in one fell swoop, or it could be a more worrying situation whereby they feel like they would be better off out of the agreement. Both options are likely to leave the debtor with a fresh pile of administrative charges on top of the debts and there’s no guarantees that it won’t adversely affect their credit score even further.
Regardless of what point an IVA failed it is regarded by creditors as a serious violation of trust. The inability to pay back debts, especially on a debt restructuring scheme such as an Individual Voluntary Arrangement, shows the creditors that lending you money poses a serious risk to their chances of getting it back. Before entering into an IVA you MUST make sure that you can afford the repayments, even if the unexpected should happen and your income drops. If you can’t then you may end up in a bigger mess than what you started with and the financial effects will be long-lasting and devastating.
*Up to 85% of debt can be written off in some individual cases. Depending on your own situation, the amount which can be written off will vary from person to person. Realistic levels of debt to be written off are between 20% and 85%, however this depends on your current credit policy, income and personal assets.
Your information will be passed to a third party organisation working on a model of none advice. These advisors will be able to talk through IVA (Individual Voluntary Arrangement) opportunities with people within England, Wales and Northern Ireland. Help can only be offered following a thorough fact-finding process. When an individual meets the required criteria for an IVA, advice can then be provided.
Help and advice given will be through registered insolvency practitioners with all necessary expertise. Debt Advisory Service, along with any third-party organisations, will not give advice with regards to Debt Management Plans (DMPs). Professional debt counselling and credit services are available free of charge from specialist Money Advice Services.
If Debt Management is the option you want to proceed with, All advice will be provided by the Debt Management company.