An Individual Voluntary Agreement, or IVA for short, is a binding contract lasting anywhere from five to six years This article answers the question “I want to settle my IVA early”
If you want to end your IVA early, you need to speak with your Insolvency Practitioner / IVA company. Tell them how much money you are willing to pay and where it will come from. Your creditors will then vote on whether or not to approve the offer.
The amount you offer as a Full and Final (F&F) settlement should be based on your circumstances and the reason you want to end your IVA early.
How do you settle an IVA early?
This solution is comparable to making a final settlement offer on debts that are not part of an IVA, but the process is more formal to settle an IVA early.
- you tell your IVA firm what you want to offer;
- your IVA firm puts your proposal to your creditors as a “variation” to your existing agreement;
- the same offer is made to all your creditors and they vote on whether to accept it.
You only have time and opportunity to make one offer, so you need to get it right the first time by offering 75%. If you start with a lower percentage, such as 40% or 50%, then you won’t be successful in settling the iva early.
Remember that if you settle your IVA early, it will not improve your credit report. The marker for the IVA stays on your credit report for six years, which makes it difficult to get a new tenancy agreement or take out any form of credit like a mortgage during that time period.
Get your figures together
You need to first calculate how much you would pay into your IVA if you keep making the monthly payments. To do this, take the number of months left until your IVA finishes and multiply it by your current payment (or the amount it is likely to go up to if you recently had a big pay rise).
Initiate a conversation with your IVA firm if you’re struggling to make payments and would like them reduced. This way, the early settlement offer would only have to account for the lower agreed-upon payments.
In today’s market, it is unlikely that you will be able to remortgage your house in order to release equity. If you have the standard “12 month extension” clause in your IVA, you need to either add on extra months or convince creditors that there is not enough equity for this option to be viable.
For example, let’s say you’re 28 months into a 5-year IVA with 32 remaining. If your IVA (individual voluntary arrangement) continues as is, you will have paid either £6,400 or 44 x £200 =£8,800 total by the end of the term.
Case 1 – you are struggling with your IVA payments
If you’re in danger of defaulting on your IVA, your creditors may be open to accepting a lower lump sum payment to settle the debt early.
It may be possible to persuade your creditors to agree to your IVA being completed without any more payments.
This is what’s called “completing your IVA on the basis of payments made to date.” It’s less likely if you’re in the early years of an IVA. If this applies to you, it means you wouldn’t have to make a settlement offer. Talk to your IVA firm about this if you believe it might apply to your situation. In this case, be sure to emphasize to your firm that if creditors don’t accept your offer, the IVA will fail. So essentially, they can either take your settle or let the the whole thing go under– their choice
The creditors will want to know if your financial issues are only temporary and if your IVA has a chance of being successful. Showing proof of your current situation may help get your offer accepted:
- a new Income & Expenditure form showing you have very little spare income because of increased bills and prices;
- a letter from your doctor or a hospital appointment letter;
- copy of recent payslips
- a recent estate agent’s valuation showing there is little or no equity in your house can also clarify the position.
Your creditors may be more willing to accept a lower full and final settlement if you provide this evidence. Your creditors may be more willing to accept a lower full and final settlement if you provide this evidence.
The amount of debt you currently have is also a relevant deciding factor in what might be considered acceptable. If your IVA was only returning a minimal sum to your creditors, then they likely won’t agree to reducing that number.
Case 2 – you just want the IVA ended
If you’re not struggling, you’ll probably have to offer close to the total of the remaining IVA payments.
The agreement may be ended early for a multitude of reasons that don’t really matter – you could want to emigrate, have different career aspirations, live with a new partner or simply be fed up with the entire situation and crave a fresh start.
From your creditor’s perspective, though, this is unimportant: they can choose to take your offer of £x,000 now or you can carry on with the monthly payments.
So, on the example given above, if you offered them £3,000 they would most likely reject it, may be prepared to take £5,000 immediately but would more than likely accept £6,000. If there was some equity in your house then you might have to offer a little more to get them to accept the deal.
Case 3 – you have a windfall payment you can use
Discussing lump sums and inheritances with your IVA firm is important. Most of the time, there’s a clause in your IVA that states windfalls over £500 have to be paid into the arrangement.
You don’t have a choice here. The money has to go into your IVA, so this isn’t an early settlement offer.
- If you will pay more into your IVA than the total of the debts in the IVA, plus fees and interest, your IVA will be completed early.
- If the amount you propose is unable to cover your debts, your creditors will continue expecting monthly payments from you.
Although less common, sometimes you may receive a windfall payment that doesn’t have to be paid into your IVA account. For example, this could be compensation for a personal injury. If this is the case, you get to choose what to do with the money. So, if you want, you can make an offer to settle the IVA early. Or, you could simply keep the money and let your IVA continue as normal.
If it’s your partner who is receiving the lump sum, that money doesn’t have to go into your IVA. You could either keep making the regular payments or try and settle the IVA early by paying a sum close to what would be left in monthly repayments (as seen in Case 2).
Case 4 – your IVA firm suggests you take a loan
You may get an email from your IVA firm saying you can get an “early exit loan” if you’re more than halfway through your plan. This offer needs to be thought about carefully, as the loan could be expensive (eg around 30% interest) and drag out the time you are in debt.
IVA settlements are unpredictable
It’s challenging to predict whether or not creditors will accept an offer, so it really varies case by case.
Where is the money coming from?
No matter the source of money, be it a relative or friend, your Insolvency Practitioner will want to see evidence of its origin for the lump sum payment.
The person offering the money should write a letter that states they are willing to gift you £x,000 so you can complete your IVA. The letter should also specify that this is not a loan and offer a timeline for the transaction. e.g. “This offer will remain open until dd/mm/yy. I will be able to make the payment within x weeks of being informed that my offer has been accepted.”
The Insolvency Practitioner may request documentation to back up the identity of the donor, like a passport or driver’s license copy. Also, they’ll need evidence that the donor has enough money to pay the lump sum, for example, a bank statement printout.
If you receive a £5,000 Christmas present from a family member, you could use this to pay off your IVA and continue making the monthly payments. It’s essential to say that you will only get this lump sum if your proposal to settle the IVA early is accepted.
Be careful! And check the details!
There are two situations where you have to be very careful and get the settlement agreed first:
- Creditors must accept your offer before you take any money out of your pension, or else it’ll be seen as a windfall payment and the IVA will continue!
- In order to agree on a final selling price, you MUST establish the amount beforehand.
If your IVA firm agrees to put forward your proposal, you should make sure you understand the specifics of what is being proposed.
What if the offer is refused?
If your creditors deny the proposal, you’ll have to keep up with regular payments.
You could explore whether a higher IVA settlement offer might now be acceptable with your IVA firm. Or if you make the same offer in another six months or twelve months, then your creditors will receive more money because of the additional payments made during that time.
If making payments becomes unmanageable, your IVA may have to fail. This is more likely to occur if difficulty arose early into the IVA and a full or final settlement cannot be offered.
“My IVA firm won’t put my F&F offer to my creditors”
If you only have a few months remaining, it’s not worth going through the process of an IVA. It usually takes at least two to three months to get everything organised and approved by your creditors. If you’re close to being done with your payments, your IVA firm is likely just telling you that it’s simpler to make the remainder of the payments. For free debt advice contact us at Become Debt Free on 0800 169 1536.