Summary: This article explains why an IVA may fail, and the possible outcomes if it does.
Individual Voluntary Arrangements (IVAs) are an alternative to bankruptcy, available to individuals who are insolvent and have around £12,000 or more in unsecured debt. They allow a debtor to repay their creditors a monthly amount that is based on what the individual can reasonably afford and usually lasts for 5 years, after which time, any outstanding debt is usually cleared. It is often preferable to bankruptcy as the individual is less likely to have to sell their home.
What can cause an IVA to fail?
An IVA is a legally binding agreement between the creditors and the debtor, and as such there are often terms and conditions associated with it. Should any of the terms be broken, then it is possible that IVA could be deemed a failure. For example, a clause in an IVA often stipulates that any windfall income, such as a lottery win or inheritance should be notified to the IVA supervisor immediately so that any adjustments can be made. If no notification is given, it could be deemed a breach of the terms. The most common reason for an IVA to fail is due to missed payments. Generally, 3 missed payments could result in the IVA failing.
What will happen if my IVA fails?
If the creditors feel the IVA has failed due to a breach of the terms, they may ask for a 'certificate of termination' which states the fact. While it is possible that the creditors may at this point petition for bankruptcy, it is not always the case as it would depend on if bankruptcy would actually result in them getting a return on the money owed. When an IVA fails, the individual will in effect be back in the same position they we in before starting, but any money paid in, will be lost.
Is there any way to prevent an IVA failure?
As failure is often related to missed payments, it is important that the individual speaks to their IVA supervisor immediately to seek advice. They may be able to review the finances and submit an 'IVA variation' to the creditors. This usually requests an amendment to the monthly payments to allow for a change in circumstances. The creditors will have to agree to the change, but if the variation means they will still receive more of the outstanding debt back than if the individual was declared bankrupt, they are likely to agree, though it could result in an extension to the overall length of the IVA.