IVAs may be touted as the solution to all of your debt worries but they aren't to be taken lightly. Read our guide to find out what you're really letting yourself in for when you enter into this kind of agreement.
An IVA (Individual Voluntary Agreement) is a course of action you can take if you have debts that are so unmanageable it would take you most of your life to pay them off. They are an agreement between you - the debtor - and your creditors that allows you to make more manageable repayments on your debts, have interest frozen, and even have part of your debt written off altogether.
As such they can sound like the answer to your prayers if you have a lot of debt and can’t see a way out of it, but don’t want to go as far as considering bankruptcy. IVAs were originally designed as an alternative to bankruptcy and in many ways can act as a suitable solution for some that won’t require you to declare yourself bankrupt.
However, in reality arranging an IVA is never an easy option. While it can admittedly be the right route for some, it is by no means a suitable answer for all and is certainly not the get-out-of-jail-free card it’s often made out to be.
How does it work?
An IVA, as we’ve established, is an agreement between you and your creditors (whoever has lent you money, whether a credit card provider, loan provider, or other lender). To begin IVA proceedings you’ll need to hire a licensed Insolvency Practitioner who will liaise between you and your creditors to make all the necessary arrangements.
These arrangements will generally include freezing the interest mounting up on your debts, and working out a more manageable amount that you can pay towards your debts every month. This will involve the Insolvency Practitioner looking at all your finances and allocating you a monthly amount for living expenses such as rent, food, and utilities bills. The rest will go towards the monthly payments for your creditors.
Once the IVA is in place, it’s a legal agreement, and will usually last for up to five years. At the end of this five years, even if your debts have still not been completely repaid (which is unlikely if you have a lot of debt and are making smaller repayments) the remaining debt will be written off.
For the IVA to go ahead, at least 75% of your creditors (in terms of how much you owe them) will have to agree to the arrangement, although they are likely to agree because it means they are at least getting some money from you rather than chasing you for payments that may never otherwise materialise.
Why get an IVA?
The main reason you might get an IVA is the valuable breathing space such an agreement allows you; particularly if you have lots of debt with various creditors who are making your life a misery by constantly chasing you for the money. Your creditors will not be able to take legal action against you for outstanding debts if you have an IVA, because they will have agreed set monthly repayments with you through your Insolvency Practitioner.
Having an IVA in place is also seen as a preferable solution to bankruptcy because it will at least keep the roof over your head and allow you more control over your assets than being bankrupt would. And while your IVA will be published on the Insolvency Service website, at least your name won’t be smeared in the papers as it would if you were declared bankrupt.
What are the catches to consider?
While the idea of having much of your debt written off can seem like an attractive option, even if it does take years, it’s very important to consider the consequences of entering into an IVA to help you decide if it really is the right course of action for you.
Though an IVA won’t leave so much of a black mark on your credit record as bankruptcy would, a note of the agreement will remain on your record for six years after it has been completed. As well as making it harder for you to get credit of any kind, you may experience difficulty in renting a flat, getting a mortgage, or even getting a job as some companies require you to have a clean credit history.
You will have to pay various fees in order to get the ball rolling on an IVA, which means that you are spending money that you could be using to try and grapple with your debts. You’ll have to pay fees to your Insolvency Practitioner for making all the necessary arrangements and you may also have to pay a relatively large admin fee before the IVA proceedings even begin.
Once the IVA is in place it constitutes a legal agreement. This means that if you have any trouble making the agreed repayments and have to default on them, your Insolvency Practitioner can justifiably force you into bankruptcy - meaning that paying to arrange an IVA will have been money down the drain. As such it goes without saying that you’ll have to be sure you can keep up the agreed payments throughout the life of the IVA.
What’s more, while the IVA is in place (which could be up to five years) you will have to account for all your spending as your finances will be monitored by your Insolvency Practitioner to ensure that any spare money you have is going towards your debts. While you may be allowed, say, £50 a month of your disposable income for emergencies such as a car breakdown, you would have to consider if you really could live on such limited means for up to five years.
It’s also worth noting that if you happened to get a pay rise during your IVA the extra money would go to your creditors, and you may be required to use equity in your home to pay off debts.
What else should I consider?
While IVAs are often made out to be the ideal solution to debt problems, they certainly aren’t suitable for everyone. Ultimately IVAs as well as bankruptcy should be treated as last resorts and often aren’t necessary.
It’s best to approach the idea of an IVA with caution, especially if you are being recommended one by a company who might have an ulterior motive to ‘sell’ as many of them as possible.
If you are considering getting an IVA, it’s vital that you get advice from a free, independent debt charity such as the Citizens Advice Bureau or CCCS (Consumer Credit Counselling Service) whose only motive will be to help you out of debt - meaning you can rely on their advice to be impartial.
