The debt help charity Stepchange call it an insolvency secret. Most people now have heard of IVA’s – and most will associate an IVA with 5 or 6 years of repayments and the possibility of equity release for homeowners.
But less people are aware of another way of writing off unsecured debt in an IVA – namely by way of a lump sum payment. Such an IVA is still an IVA and remains on a person’s credit file for 6 years. However the actual IVA is over very quickly and involves no ongoing monthly payment. For many, such an option is completely out of range. There is no possibility of raising a significant amount of funds. But for some – it could be an ideal solution.
The idea is that someone with debts that cannot be repaid contractually, offers to the creditors a lump sum instead of 5 or 6 years’ worth of payments. Several qualifications are necessary. The first, unsurprisingly, is a lump sum. It may be that a family member or friend could help us with a gift or informal loan that could be offered to creditors as a one-off payment to cover all unsecured debts. Or it could be a redundancy settlement or endowment policy that becomes available. Then, a debtor needs to show that they have enough income to be able to meet living costs, but not enough to meet debt repayments.
But if a debtor has monthly available funds and their own lump sum (e.g. a windfall of some sort) then creditors will want both the monthly payment and the lump sum. The guiding principle is that the creditors will want to see that the debtor is doing the very best they can to pay as much of the debt back as possible.
The advantages of a lump sum IVA are clear – the debt is settled and any future changes of financial circumstances will be irrelevant as far as the IVA is concerned because the lump sum if accepted, is full and final. For homeowners, equity release becomes irrelevant as again, the lump sum means the IVA is over (though as mentioned earlier remains on a person’s credit file for the full 6 years).
The advantages to the creditors are also clear. A lump sum upfront can often be preferable to a similar amount spread over 5 or 6 years with all the uncertainty that the time period can involve. So for debtors fortunate enough to have access to such funds – it really can deal with the debt decisively without the need for ongoing supervision lasting 5 or 6 years (or more).