How Does an IVA Work?

An IVA is a formal agreement between an individual and their creditors, which may be suitable for people with an unmanageable level of unsecured debt that they can't afford to repay within a reasonable amount of time - as long as they can commit to making regular reduced monthly payments.

Basically, if enough of the creditors agree to the terms proposed by the individual and their IP (Insolvency Practitioner), the individual will commit to repaying as much of their debt as they can in (in most cases) five years - and the creditors will agree to write off any outstanding debt once the IVA comes to a successful conclusion.

However, an IVA is a form of insolvency, and will have a significant impact on the individual's credit rating for six years from the time it starts. It does allow people to write off the debt they can't afford to repay - but it's no 'easy option'. If you do require IVA help, click here.

It's far better to avoid getting into that kind of situation in the first place. One way of doing that is to work on your budgeting skills…

Budgeting

Budgeting is all about understanding and controlling finances - and making changes where necessary. In order to work out a budget, an individual will have to calculate their total income and their total expenditure.

Total income should include all the money they earn/receive - such as salary, benefits and gr

Total expenditure should include all priority debts and essential living expenses, such as food, utility bills and mortgage/rent payments. It shouldn't involve non-essential spending and payments to unsecured debts.

Once these figures have been calculated, the individual should subtract their total expenditure from their total income. This will give them their 'disposable income'. Disposable income is the money available to put towards servicing their non-priority debts, such as credit cards and personal loans.

In order to avoid falling into unmanageable debt, the individual should make sure their disposable income is enough to cover their non-priority debts, so they can work on paying off those debts. If it isn't enough, they could take steps to boost their total income, or lower their total expenditure - or seek professional debt advice.

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