The IVA is typically a 5 year debt solution so why have you been told your IVA could last for 6 years? There is one main reason for this and it usually works in your favour. An Individual Voluntary Arrangement is a formal debt solution where you pay what you can reasonably afford in to the solution each month, along with any realisable equity from assets, stocks, shares and other investments.
This means that your house is generally safe and secure however, near the end of your IVA, you may be asked to remortgage to release your equity from the property. Due to your credit score and your reasons for remortgaging, this can be very difficult to do.
Why Is an IVA 6 Years?
In the IVA you will never be asked to sell your house. This is part of the process to help you retain your property, should you wish. However, the equity would go into the IVA. But, what happens if you can’t achieve a remortgage?
Remortgaging during an IVA can be difficult sometimes, so instead of remortgaging to release the equity and to help you keep your property, the IVA could be extended for 1 extra year. This is known as the equity year. In the sixth year, you offer to pay another 12 month’s worth of contributions in order to avoid selling your house and because you can’t obtain a remortgage.
If you proceed with this route your house will not be sold and any equity will remain with you. The final year is an offer to the creditors that you make in respect of the outstanding equity. Even if your equity is £20,000 and you’re only offering £5,000 over 12 months, this is likely to be accepted.
For example, Mr and Mrs Smith own a property worth £250,000. Their mortgage is £210,000 meaning they have around £40,000 equity in their property. Their unsecured debts are £45,000. The payment into the IVA each month is £350. Over 5 years they will repay £21,000 of the £45,000 unsecured debt. Near the end of the IVA they will be asked to remortgage, but their loan to value is around 16% and they can’t release any money. Their IVA would be extended for 1 extra year with a further (£350 x 12 months) £4,200 paid into the solution. This means the couple will repay £25,200 towards the creditors. After fees and charges for managing the IVA are removed the money in the pot is distributed to the creditors and any outstanding debt is written off.
Do I have to accept the 6 year IVA?
You don’t have to proceed with the final year of the IVA although it is often preferable. The extra year is called the equity year and usually allows you to retain your asset e.g. house and any equity within it. If you don’t want to complete a final year you do have a couple of options.
The first is you can sell your asset and pay the money available into your debt solution. Often this money will amount to more than another year’s contributions into your IVA though. Secondly, you could get the money from a third party for example a family or friend. Both these options would mean your IVA would finish after 5 years.
IVA Advice & Help
If you would like advice and help on an IVA you should speak to Debt Support Trust on 0800 085 0226. Our advice team based at the charity is open from 8am to 7pm Monday to Friday and we have specialists in all debt solutions ready to help.
If you need debt help complete our debt analyser enquiry form below.