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Individual Voluntary Agreements – IVA

In the UK there's a formal name, IVA, for the agreement between a debtor and a creditor to alter debt terms. The U.S. may not employ the name, but the idea is essentially the same. It's a method for agreeing to settle an outstanding debt, usually one that's overdue and that the debtor can't pay.

The UK has a much more formal structure for such agreements, and they often involve Licensed Insolvency Practitioners. The U.S. doesn't have a recognized profession by that name, but debt counselors, financial advisers, some attorneys and others frequently perform the same role.

The agreement is never ideal for either party but, as in any compromise, it's better than a total loss on either side. Such agreements involve setting terms for repayment, often with the creditor accepting a lower total amount than the original debt. Sometimes the interest rate is lowered, sometimes it's not - each agreement is just what the term says, individual.

The advantages to the debtor are fairly obvious. He or she gains relief from any legal action such as garnishment of wages, asset seizure, home foreclosure, etc. There are also psychological benefits, since (presumably) the arrangement involves terms the debtor can actually meet. Once in place, a very unpleasant episode moves into a new phase.

But, the creditor benefits as well. The lender won't usually receive the total expected amount. But such agreements can lengthen the terms of the original loan, and (even at a lower rate of interest) can bring in more money in the long run. More often, the debtor agrees to repay some percentage of the original amount. How much varies, but figures as low as 50% are not unknown and 75% is common.

That doesn't sound like a great deal for a creditor, but if the debtor demonstrates that the amount is really all he or she can afford - and the alternative is the debtor filing bankruptcy or the creditor incurring legal costs to sue - it can be seen as the best available option for everyone.

One of the big advantages to a debtor is not just a lower amount of debt to repay, or even a lowered monthly payment, but simply what doesn't happen. Avoiding bankruptcy is a major benefit. Bankruptcy, while some may see it as an easy way out, ruins your credit for several years.

After filing bankruptcy, it can be nearly impossible to obtain a home loan for 10 years. Auto loans will be difficult to get at anything near a favorable rate. Credit cards - of any kind but those with ruinous interest rates or that are just disguised debit cards - will be a memory. In today's world that means restricted online shopping, difficulty making airline reservations and a host of other inconveniences.

In the UK, an IVA is a formal arrangement made through the courts. In the U.S. it can be nothing more than a signed letter containing the terms of the agreement. But it should be, at minimum, put in writing by the creditor. That gives the debtor a legally binding agreement that he or she can use as a reference and for legal protection.