The IVA or Individual Voluntary Arrangement is an essential piece of legislation which allows people to avoid declaring bankruptcy. It suits many who are over £15,000 in debt provided that they are in receipt of regular income, employed or self employed, and owe at least three different creditors. You could have a large percentage of your debt written off.

An IVA is a legally binding agreement which protects you against any further action from your creditors. Once you've committed to an IVA, you could become debt-free in sixty months.

With an IVA you agree with your creditors to paying only what you can afford in a single payment each month over the period of five years. Your creditors agree to write off a percentage of your debt which you're not able to repay. The IVA is an extremely powerful tool enabling you to clear your debt and return to a clean financial bill of health.

Essentially, an IVA is a haggling process between the individual, his or her insolvency practitioner and creditors. Generally, the debtor will pay a lump sum upfront to the creditors and the insolvency practitioner, followed by a series of monthly payments. A meeting of creditors is always held, in which case it is important for all creditors to be informed.

The repayments are calculated through an analysis of the debtor’s income and expenditure. Once agreed, the repayment programme forms part of a legally binding contract.

The individual taking out the IVA can apply to the court for an interim order that prevents creditors from proceeding with a bankruptcy petition while the order is in force.  However, the creditors can still force the debtor into bankruptcy if he or she does not meet the requirements of his or her side of the deal. An IVA can only go ahead if creditors representing more than 75 per cent of the debt agree to the deal.

Debts are settled within a reasonable and fixed period of time with any interest and debt charges frozen. Creditors will be prohibited from demanding additional payments.

Once a decision has been made that an IVA is right for you, you will be asked questions regarding your current financial situation. Based on the information you have given, a repayment amount will be agreed with you. Once proposals have been drawn up you will need to check and sign these and return them to Debt Free Nationwide.

Dependant upon the severity of your circumstances, an Interim Order can be obtained.  Once this is in place, no creditors will be able to take legal action against you.  A meeting of creditors will still be convened to allow the creditors to vote on the IVA proposal.

For an IVA to be approved, creditors will be called upon to vote either for or against the arrangement. If only one creditor votes "for" the IVA it will be approved however if the creditor who voted against the IVA represents more than 25% of the total debt you owe the IVA will fail. This is because an IVA will only ever be approved if 75% in monetary value is voted for.  If creditors don’t vote then their decision is not taken into account and they just have to accept the decision made by the other creditors.  Their vote will not be deemed as an acceptance towards the IVA.

An IVA is legally binding. As long as you keep up the repayments, when the term of your agreement is finished, you will be free from these debts regardless of how much has been paid off.

During the period of your arrangement your financial situation will be reviewed regularly to see if there has been any change in your circumstances.

Most Individual Voluntary Arrangement - IVA cases are based around one, affordable, monthly, payment, over a period of 60 months. This one affordable payment is based on your earnings minus your expenses.

In the case of a consumer IVA it is unusual for any creditors or their representatives to attend the creditors meeting as most prefer to vote by fax or by post.

It is the debtor's responsibility to pay the agreed payments which are then distributed to all creditors on a pro-rata basis in accordance with terms and until the successful completion of the Individual Voluntary Arrangement - IVA. It is in the debtors own interest to maintain their payments as failure to pay will almost certainly result in the failure of the Individual Voluntary Arrangement - IVA.

Upon the successful completion of the Individual Voluntary Arrangement - IVA the debtor will be considered debt free even though they may not have actually paid off all of their debts in full. Any outstanding balances are written off (known as a composition of debts) and the debtor is then free to make a fresh financial start.

It is worth noting that if you do enter into an Individual Voluntary Arrangement - IVA with your creditors and you have an endowment policy linked to your mortgage then you may be expected to cash it in and pay the proceeds into the arrangement. Likewise, if your property has a reasonable amount of equity then it is likely that a some of it will have to be released at sometime during the arrangement (usually the end), so it can be paid to creditors. Drastic as this may sound it can be a deciding factor in whether an Individual Voluntary Arrangement - IVA is approved by creditors and a realistic way in which a debtor can retain their property.