An Individual Voluntary Arrangement is the most popular debt solution available in the UK and has helped hundreds of thousands of thousands of people manage their unaffordable debt.
Like all debt solutions, however, there are advantages and disadvantages of using an IVA to deal with your debts. Below, we outline your IVA pros and cons.
What is an IVA?
An IVA is a popular debt repayment plan available in England and Wales. It helps people use a monthly payment to deal with unsecured debts they can’t afford to repay.
The agreement is managed by a debt professional known as an Insolvency Practitioner, who will take monthly payments and deal with creditors on the individual’s behalf.
Under the terms of the arrangement, an the individual will make a singe payment towards their debts each month. At the end of their payment term, which normally lasts five or six years, any remaining debt will be written off, putting them in a better position to live a debt free life.
How we helped Paige
It was literally the best decision of my life, and it has actually changed my life, cheesy as that sounds, it has changed my life.
Paige , IVA Customer
What are the pros and cons of an IVA?
An IVA is a legally binding agreement
An IVA is a legally binding agreement between an individual and their creditors to repay money owed. This means you enter into a contract with your creditors which both parties will have to stick to.
The power of a legal binding debt solution is that once a majority of your creditors approve the IVA, every one of them will be bound by its terms, even those creditors who rejected the proposal.
All your debts are transformed into an affordable monthly payment
One of the main problems with owing debts to multiple creditors is that it gets really difficult to track monthly payments. This can lead people to miss payments, which can cause serious problems for your credit rating and your financial situation.
In an IVA, all your unsecured debt will be turned into a single monthly payment based on what you can afford. This ensures that the repayment process is made much simpler, and that you always have enough left over each month to deal with essential outgoings.
IVAs protect against legal action and creditor harassment
One of the scariest things about owing money to banks or payday lenders is the threat of facing legal action if you can’t afford to repay. The beauty of an IVA is that a legally binding agreement ensures you can’t be pursued by any creditors included in the arrangement.
An IVA will also freeze interest rates and charges on your debts as soon as the arrangement comes into effect, making your debts easier to repay overall.
You can protect assets like your home and car
One of the most worrying things about being in crippling debt is the thought of your mortgage broker or bank seizing your home. Even debt solutions like bankruptcy have implications for your property, as all of your valuable assets will be put towards the money you owe.
In an IVA, you are guaranteed full protection for assets like your home and car. Once your creditors sign the agreement, you can rest assured they can’t seize your property – you will be given the time you need to make payments towards your debts without giving up your assets.
An IVA can write off up to 81% of your unsecured debt
One of the most common questions when people first research debt solutions is whether they might qualify for a debt write off – in other words, have part, or all, of their unpaid debts forgiven by the lender.
Unlike other debt solutions like a Debt Management Plan or debt consolidation, an IVA does include a partial write off. Once you have completed your payment term, any unsecured debt not paid off by your monthly contributions will be cleared by the lender. It’s not uncommon for someone to write off 60, 70, or even 80% of their total debt using an IVA.
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All debt solutions affect your credit rating
When you first enter an IVA, it will hurt your credit score – the rating given to you by credit reference agencies based on your financial history.
Like all debt solutions, an IVA will be listed on your credit file for six years from the day the arrangement starts. The reason it will hurt your credit score is that using an IVA signals to lenders that you have trouble repaying what you owe. The good news is an IVA will be wiped from your credit report after six years, and can help you improve your credit long-term.
The creditors you owe money to can reject your IVA
Even if you meet the initial criteria for applying for an IVA to deal with your debts, that doesn’t automatically mean the arrangement will be rubber-stamped. It’s up to your creditors to approve your IVA.
You need a majority of your unsecured creditors to agree to the proposal for your IVA to be approved. This usually means around 70% of your creditors have to agree to the terms. If you fail to reach that bar, your IVA will be rejected and you may have to tweak the proposal or look for a more suitable debt solution.
IVAs are listed on a public insolvency register
A lot of people are uncomfortable with the idea of people they know being aware that they’re in a debt solution, which is why it may be seen as a disadvantage that all IVAs are listed on a public insolvency register.
The insolvency register is a public document that lists all active forms of personal insolvency in the UK, and will hold a record of your IVA for six years, during which it can technically be accessed by the public. In reality, the people most likely to access this information are lenders like mortgage brokers and banks.
You may need to release equity as part of the arrangement
The typical length of an IVA payment term is five years or six years. Whether you can end your IVA a year early depends on whether you are a homeowner with available equity in their property.
If you do own your own home, you will be required to release equity in the property in Year 5 of the IVA. The funds raised will then be put towards your debts. If you don’t own your home or carry enough equity, you will be expected to make IVA payments for a further 12 months.
An IVA can fail if your financial circumstances change
While it’s uncommon, it is possible for an IVA to fail if an individual hasn’t help up their end of the binding agreement. Typically an IVA fails when you can’t pay your monthly IVA payments successfully.
When an IVA fails, the individual involved will need to find another way to repay the money they owe to creditors. Failure to do so can lead creditors to enforce bankruptcy or consider further legal action as a way to recover money owed.
Where can I get free debt advice and guidance?
It can be scary to realise you’re struggling to pay your bills on time find your debts piling up, especially if you’re worried you simply can’t afford to repay the money you owe.
Your Debt Expert can help. We’re specialists in IVAs, the most popular debt solution in the UK and our experts can match you with debt management solutions that fit your individual financial circumstances.
For free advice and reliable debt help, get in touch with a friendly adviser at Your Debt Expert today.