What are Individual Voluntary Agreements?

In the UK there’s an official name, IVA, for the agreement between a debtor and a creditor to rework debt terms.  The U.S. may not use the name, but the idea is basically the same.  It’s a process for agreeing to reconcile an outstanding debt, typically one that’s overdue and that the debtor can’t pay.

The UK has a much more formal arrangement for such agreements, and they frequently require Licensed Insolvency Practitioners.  The U.S. doesn’t have a recognized occupation by that name, but debt counselors, financial advisers, some attorneys and others frequently perform the same function.

The agreement is in no way perfect for either party but, as in any negotiation, it’s better than a total loss on either side.  Such agreements involve determining terms for repayment, oftentimes with the creditor taking a lower total amount than the original debt.  From time to time the interest rate is decreased, sometimes it’s not - each arrangement is just what the term says, individual.

The benefits to the debtor are fairly clear.  He or she gains reprieve from any legal action such as garnishment of salaries, asset seizure, home foreclosure, etc.  There are also emotional benefits, since (most likely) the arrangement involves terms the debtor can actually conform to.  Once in place, a very unpleasant period moves into a new stage

But, the creditor benefits also.  The lender won’t generally receive the total expected amount.  But such agreements can extend the terms of the original loan, and (even at a lesser rate of interest) can bring in more money over time.  More frequently, the debtor agrees to repay a few percentage of the original amount.  How much varies, but numbers as low as 50% are not unknown and 75% is usual.

That doesn’t sound like a great arrangement for a creditor, but if the debtor manifests that the amount is really all he or she can pay for - and the option is the debtor filing bankruptcy or the creditor incurring legal costs to sue - it can be seen as the most beneficial available alternative for everyone.

One of the big benefits to a debtor is not just a lower amount of debt to pay back, or even a lowered monthly payment, but merely what doesn’t happen.  Avoiding bankruptcy is a foremost gain.  Bankruptcy, while some may see it as a trouble-free way out, ruins your credit for a number of years.

Following a bankruptcy, it can be almost impossible to get a home loan for 10 years.  Auto loans will be hard to get at anything near an encouraging rate.  Credit cards - of any kind but those with disastrous interest rates or that are just camouflaged debit cards - will be a memory.  In today’s world that is equivalent to limited online shopping, difficulty making airline reservations and a host of other troubles.

In the UK, an IVA is a formal agreement made through the courts.  In the U.S. it can be nothing more than a signed note comprising the terms of the contract.  But it should be, at least, put in writing by the creditor.  That gives the debtor a lawfully binding agreement that he or she can exercise as a reference and for legal defense.