It is an unfortunate fact that many are really struggling financially right now. And because of that, many will be considering debt management options, including even declaring bankruptcy. One of the other options available though are Individual Voluntary Arrangements. Here is a guide to IVAs, and whether they are the best option for you.
An IVA, like bankruptcy and Debt Relief Orders, is a type of insolvency.
It’s a long-term, legally binding agreement between you and your creditors that can’t be easily changed or terminated; typically, you make monthly payments for five or six years; if you have a home with equity, you’ll usually have to remortgage in the last year or make an extra year of payments; at the end of a successful IVA, your remaining debts are wiped out; and at the end of a successful IVA, your remaining debts are wiped out.
If you have assets to protect, an IVA may be a viable debt solution.
However, many IVAs fail. This was around 30% in 2019, and it’s generally because you can’t afford to make the monthly payments that seemed reasonable at first. Five or six years is a long time, and everything might change in that time.
One of the major advantages of an IVA versus bankruptcy is the protection of a home with equity. However, an IVA is not the greatest debt solution for everyone who owns a home.
In the final year of your IVA, you’ll have to try to get money out of your home. Before you begin the IVA, read the section below on Equity Release to understand what will happen.
In the next five to six years, mortgage rates may rise. Will you be able to afford your IVA if your mortgage payments increase?
Do you intend to relocate during the IVA? Even if your IVA is over, you won’t be able to secure a new mortgage for six years if you have an IVA on your credit record.
Before you begin an IVA, you must have a thorough record of your debts and the sums you owe. Any debts you have will be immediately erased if you file for bankruptcy, but you must list them in an IVA or they will not be included.
Although debts can occasionally be added later, your IVA may be extended, causing it to take longer. It’s far better to pay off all of your bills straight away.
If you owe HMRC money, you must normally have submitted all past tax returns.
However, you must know what will happen if you receive irregular amounts and sometimes significant lump sums. Because approximately half of the extra money is usually taken for your IVA, this does not imply that your IVA will be completed any sooner. Only if you return all of your bills in full, as well as the IVA firm’s costs, which will be at least £3,500, will your IVA be terminated early.
You should probably avoid an IVA if you are expecting a significant wage raise. Because you wind up paying so much more into it, the IVA may only write off a small portion of your debt in this circumstance. It might be preferable to put off thinking about your bills until you acquire a new job. A short-term Debt Management Plan can help you get to that point.
A professional IVA business will help you grasp all of the words in your IVA — keep asking questions until you’re certain you understand everything.
Talk to another IVA firm if you don’t think your current one is being helpful.
Inquire about who will be in charge of your IVA. Some firms who set up an IVA subsequently hand you over to another firm to oversee the five or six-year agreement. This is not a good idea in my opinion. You also need to be able to talk to someone about any issues that arise, rather than being sent to a “warehouse” where you are simply another case number.
IVAs were created with the intention of protecting assets such as a home’s equity or stock in a private firm. If you don’t have any assets, bankruptcy or a DRO will almost certainly be faster and less expensive than an IVA!
Consider the following contrasts: IVA vs. DRO – A Debt Relief Order is usually a better option than an IVA if you qualify. Don’t become one of the thousands of people who are mis-sold an IVA each year, only to have it fail because they should have had a DRO.
Bankruptcy or IVA: Don’t be afraid of the word bankruptcy and believe that an IVA is a better option; in many cases, bankruptcy is a MUCH better option unless you have valuable assets to protect:
In bankruptcy, 5 out of 6 people do not have to make any monthly payments.
IVAs and bankruptcy have the same effect on your credit score and your ability to obtain a mortgage afterward.
Bankruptcy is a reliable option that is unlikely to break down— 30% of IVAs fail, leaving you with your obligations.
A DMP or an IVA: A flexible DMP is generally preferable than a rigid IVA if your situation is likely to change — for better or worse.
If you have a debt-ridden partner, don’t assume that getting an IVA for both of you is the simplest solution. It may be preferable (faster, less hazardous) for one of you to file for bankruptcy or a DRO, or if one of you could avoid insolvency and safeguard their credit record entirely.
Check to see if there are any refunds available for unpayable lending. If so, you may not need an IVA after all.
To get through the next five years, you’ll most likely have to work hard at budgeting. If you can set aside a small amount of money each month, you will be in a better position to deal with any problems that arise.
Every IVA should be reviewed once a year. If not much has changed, this is usually a quick and painless procedure. However, if your income has increased, you may be required to pay more, and if your costs have increased, this is your opportunity to request a lower payment.