An IVA functions as an effective debt solution through its ability to merge multiple debt payments into a single monthly repayments, all while providing security for your home and car and protection from threats of legal action by your creditors. The terms put in place at its outset establish a clear route towards a life free from money warnings, and provided you maintain your repayments the process concludes with your debts being written off as paid in full.
While this is an attractive proposition for those struggling with financial problems, it is important to be aware that this process is legally binding once started. Therefore, you must be fully acquainted with the benefits and risks of using an IVA before you begin. There are also limitations on who is eligible for an IVA, and what types of debt can be include in the arrangement.
In this guide we will explain:
- How to know if you qualify for an IVA?
- What happens if my circumstances change during my IVA?
- Are there restrictions on who can use an IVA?
- Will your assets be at risk if you use an IVA?
- What are the financial repercussions of using an IVA?
- Advantages and disadvantages of an IVA
The first consideration you will need to make is how to set-up an IVA. It is not possible for an individual to do so by themselves, which is where your Insolvency Practitioner comes in. You should first make sure that whoever you are speaking to for advice are accredited as Insolvency Practitioners. Here at IVA Adviser our team have gained a reputation for their ethical advice and professional administration of debt solutions as Insolvency Practitioners. Although you cannot set-up an IVA by yourself, it is important that you are comfortable with and fully informed of the details of any arrangement and still feel fully in control of your financial situation.
In addition to setting up your IVA, you Insolvency Practitioner has a second important function, which is to distribute payments to your creditors during the agreement. This allows you to a unite you varied repayments into a single monthly amount to be disbursed. The Insolvency Practitioner also deals with any fees and charges, and will give you a detailed report of how and when repayments need to be made. The charges incurred by using this processed are recovered from the creditors, not directly from you. This means the Insolvency Practitioner will make the appropriate deductions for their services each month before the payments are distributed to your creditors.
Your Insolvency Practitioner will also be on hand to assist you should you encounter any difficulties during the IVA or if you financial situation changes – either for better or worse.
Changing circumstances are common, and need not derail a plan which is on track to solve your debt problems. If you find your situation has changed to the extent that you are struggling to meet your monthly obligations, or if you experience sudden, short-term financial difficulties it may be possible for your Insolvency Practitioner to negotiate with your creditors in order to award you a ‘payment holiday’, which will allow you to set yourself back on the path towards repaying your debt. If your change in circumstances will affect your long-term ability to repay your debt then it might be better to reduce the level of your payments. Again, this is done by your Insolvency Practitioner negotiating on your behalf.
It is also very possible that your circumstances will improve, however, and if this happens you will need to contact your Insolvency Practitioner in order to make them away. This is in case you are required to use your a cash injection or improvement in your income to make additional contributions to your creditors. Examples of these situations include an increase in your monthly disposable income or if you inherit cash or otherwise receive a lump sum of money.
Provided you are resident in England, Wales or Northern Ireland and can offer terms which your creditors are likely to accept there are few barriers to you using an IVA. On such barrier, however, is if you are bankrupt before or are now subject to a bankruptcy order.
Aside from this however, the main restrictions on using an IVA apply to the types of debt which can be included.
While various types of debt are eligible there are certain exclusions, such as council tax arrears, child support arrears or legally enforceable fines, such as court or traffic fines. Any secured loans are also excluded, and the most typical example of this would be your mortgage. It is very important that you give an accurate account of these debts to your Insolvency Practitioner before you submit your IVA proposal so that they are included in your monthly budget when the schedule of payments is being established.
In the case of your mortgage, it is highly unlikely that it will be included due to the fact that the debt is already secured against your home. It is possible provided your lender agrees to the proposal, but it is very uncommon for such approval to be given. Your mortgage repayments will still be safeguarded, however, as your Insolvency Practitioner will propose repayments which take this amount into account.
One important note to bear in mind when assessing what types of debt can be included is that an IVA is a flexible solution regardless of the total level of your debt. There is no minimum or maximum amount of debt which can be included in an IVA.
While your home may be protected by taking your mortgage or rent payments into account when you are proposing your IVA to creditors, many people using IVAs are concerned about other assets and how they will be affected by the process. One such example is your car. Provided you can demonstrate your car is necessary, such as by making a case that you need it for work, it is likely that you will be able to keep it. This may depend on the model of car, however, as if you have a new and expensive model you may need to change it to a more affordable option in order to free up funds with which to repay your creditors.
If you have a car loan, it may not be included in your schedule of repayments as a ‘secured debt’.
Although you may be eager to use an IVA to free yourself from money worries, it is important to be aware of any financial consequences which may arise from this method of debt solution.
The most immediate such consequence may be fees or charges for the administration of an IVA. While it is true that you incur charges for the management of your IVA, these charges will not be met by you directly. Instead the charges will be included in the regular payments you make each month, and will be deducted by your Insolvency Practitioner before the money is paid to creditors.
There are, however, financial implications of which you should be aware when using an IVA. One of these is the long-term effect it will have on your credit rating. While using an IVA will demonstrate to potential creditors that you have taken steps to regain control of your finances the financial instability which caused you to seek that solution will nevertheless still be reflected in your credit rating.
Using an IVA will also be recorded on your credit file, and will remain there for six years. This means that if your IVA lasts for five years – the typical duration – the record will remain visible to creditors for a further 12 months.
It is also important that you notify credit reference agencies of the conclusion of your IVA, in order to ensure that it is recorded by them. The three such agencies in the UK are CallCredit, Experian and Equifax, and you can alert them to you completion of the arrangement by sending them a letter to that effect, which will need to be signed by your Insolvency Practitioner.
When reflecting on the suitability of an IVA it might be worthwhile to run through a quick review of the pros and cons of using this form of debt solution. Include below is a list of the some of the fundamental information which may help you decide if this is an option worth pursuing
- Your debts are united in a single affordable payment, made each month towards your IVA
- You are protected from legal action
- You can clear your debts effectively while avoiding bankruptcy
- Your home will be protected provide you keep up payments, it offers more protection for your home.
- Your Insolvency Practitioner will take on the responsibility of dealing with your creditors and negotiating on your behalf
- Your total debt will not increase, with charges and interest are frozen during the IVA
- Your debts are either written off or repaid by the time you arrangement is concluded
- Your details, although limited, will be added to the Individual Insolvencies Register, where they can be accessed until three months after the arrangement concludes
- Your overall debt may risk if your IVA fails and its cost is added to the total
- Your employment may be affected
- Your protection from creditors is only guaranteed by sticking to the terms of this legally-binding agreement
- Terms of existing hire purchases may be affected