Many people who are mired in debt mistakenly believe that the only way out of their financial woes is declare themselves bankrupt. However, in most cases if they owe over £12,000 to two different creditors, then instead they could opt for an Individual Voluntary Agreement (IVA).

An IVA is a fixed term repayment plan that helps individuals alleviate debt worries and retake control of their financial situation. It helps them to continue paying their creditors without having to resort to bankruptcy by allowing them to repay a reduced monthly amount. An IVA also protects that individual’s assets from being used to repay debts.

An IVA is a legally binding agreement on both sides and they were first introduced to the UK as part of the Insolvency Act passed at the end of 1986 and is only applicable in England, Wales and Northern Ireland. Individuals in Scotland can use a separate but similar piece of legislation called a Scottish Protected Trust Deed.

How IVAs work

The mechanics of the IVA are quite straightforward. The total unsecured debt owed by an individual is summed up and instead of paying each separate creditor, one affordable monthly payment is made which is then divided amongst all the creditors.

IVAs are normally agreed over 60 months, although on occasion they can take the form of just one lump sum payment. However, whatever the term and the monthly repayment once agreed an IVA cannot be changed by the creditors.

In most cases, to qualify for an IVA an individual must owe a minimum debt of £12,000 to two separate creditors, although it will depend upon individual circumstances and the insolvency practitioner involved. When it comes to repayments, a monthly sum of £150 is least that can be repaid and that amount rises in proportion to the debt and the individual’s ability to repay it.

However, although an IVA can solve an individual’s debt problems there are some disadvantages to taking out an agreement, such as not being able to take out any new credit until the IVA is completely repaid. Your credit score will also be affected so once your IVA has been repaid you may still find it difficult to obtain credit.

So, anyone considering this debt solution is advised to speak to a specialist advisor to discuss the full list of pros and cons before applying for an IVA.

By Garry Hudson – the Senior Online Marketing Manager at Baines and Ernst, a UK leading Financial Services Company specialising in debt management.