An Individual Voluntary Arrangement (IVA) is a debt solution which involves yourself and your creditors coming to a legally binding agreement to extend your loan term and allow you to make reduced monthly repayments over this new timeframe. In order to set up an IVA, you will need to acquire the services of an insolvency practitioner, who will be tasked with setting up, managing and supervising your IVA.
Whilst an IVA can provide you with a flexible option to address your debt and alleviate the financial strain of debt in the short term, they nevertheless come with a number of dangers which could cause a long-term substantiation of your problems.
The following page will outline which factors you should consider before coming to the final decision about whether an IVA is suitable for your situation.
Who is IVA’s best suited to?
An IVA might be well-suited to your situation if:
- You owe money to more than one creditor.
- You have over £100 of disposable income each month after paying for your living expenses.
- Your creditor debts are higher than £15,000.
- You would prefer a professional to handle your financial situation.
Advantages of an IVA
Some benefits of an IVA are:
- They run for a fixed period of time, after which the remaining balance of your IVA will usually be written off, irrespective of whether you have repaid it in full or not.
- All of your creditors will be legally bound to the terms and conditions of the IVA. This means that they will no longer be able to take legal action against you for the repayment of their debt and interest and late charges will stop being applied to your outstanding balances.
- If your IVA application is accepted, then the amount you pay each month will be reduced in accordance with how much you can afford to pay.
- You will retain your home, though you might be asked to release equity in it during the last year of your IVA.
Who isn’t IVA’s well suited to?
An IVA may not be right for you if:
- You ascertain upon reflection of your finances that you do not have a sufficient amount of disposable income each month to make a meaningful payment towards your IVA.
- You only owe money to a single creditor or only have one debt
- You are employed in the legal or accounting industry. This is because a number of workers in occupations such as these have specific terms and conditions within their work contracts that prohibit them from using an IVA; often the consequence for breaching this is being made redundant.
- You do not have a regular flow of income or a steady lifestyle. An IVA is a long-term commitment that spans for a series of years, and you will need to be confident that you will be able to make your monthly IVA payments in-full and on-time throughout this timeframe. If you are currently working part-time, or receive a fluctuating salary, then it might be better to use a different debt solution, because you will put yourself at risking of losing your IVA if you miss your payments regularly.
- You might be asked to remortgage your home during the last year of your IVA.
Consider the costs
IVA’s can be expensive in the long term and you might end up paying more than your current amount. This is because you will need to acquire the services of an insolvency practitioner in order to set up your IVA, and they will charge you a fee for doing this. They will also be tasked with supervising your entire IVA, and will usually take a cut out of your monthly IVA payments to cover their fees. Usually, you should expect to pay around £5,000 to your insolvency practitioner over the course of your IVA, so you will need to decide whether you are happy to do this before making any final commitment towards acquiring one.
Your pension and savings
If you have a meaningful amount of money in a savings account, then you will most likely be asked to use some or all of it to repay part of your debt. Similarly, this might apply to your personal pension pot as well, and your insolvency practitioner will decide whether you have enough money to warrant using to repay your creditors.
Using an IVA will have a negative impact on your credit rating, and will make it substantially harder to acquire credit. The likelihood is that you will struggle to find a credit provider who will authorise granting you large sums of credit whilst you are on an IVA, and in cases where you do get their consent you will usually be given a substantially inflated interest rate on your loan.
Consider all your options
If you are considering setting up an IVA, it is important that you consider all your options in order to ascertain whether there are any better-suited solutions to your difficulties. You might want to look at:
- A debt management plan – You will need to have at least some form of disposable income each month in order to utilise this option. Like an IVA, if your offer to use a debt management plan is accepted, then you will be able to make reduced monthly loan repayments which are sized in accordance with how much you can afford to pay after meeting your living expenses. However, this term of solution is not legally binding and your creditors are under no obligation to accept your offer to use it.
- A debt consolidation loan – This could help you if you have more than one creditor who you are indebted to, a steady amount of disposable income each month and believe your financial difficulties are short-term. In situations such as these, you could acquire a larger debt consolidation loan to pay off the smaller loans and stop late and interest charges being applied to the total value of your debt. You could then pay the larger loan off in a more affordable, flexible manner.
- Bankruptcy – This might be better suited to you if you have over £10,000 worth of debt but do not own any valuable assets, such as a vehicle or a home. This is because you could have your outstanding debt written off without standing to lose a substantial amount. Bankruptcy is better suited to individuals who do not have any disposable income each month, because it doesn’t require a long-term commitment to making debt repayments each month.
Deciding on an IVA
- How does an IVA work?
- Which debts can I include?
- How much does an IVA cost to set up?
- Income and Asset Requirements
- How an IVA will affect homeowners
- How an IVA will affect your bank accounts and pension
- How an IVA will affect your credit rating
- How an IVA will affect your work, home and assets
- The lasting power of attorney
- Is an IVA the right solution for me?