If you are struggling with debt and live in England, Northern Ireland or Wales one of the most common debt solutions you’ll be encouraged to consider is an Individual Voluntary Arrangement (IVA).
This is a legally binding solution that uses government legislation to help you write off up to 81% of unsecured debt, freeze interest and charges and stop pressure from the people and companies you owe money to, often referred to as creditors.
You will make one affordable monthly payment each month for five to six years, with the remaining debt written off at the end of the agreement.
However, before you consider entering a formal debt agreement such as this, you need to make sure it’s the right one for you. With that in mind, it’s important to be aware of how an Individual Voluntary Arrangement could affect your life.
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How will an IVA impact my debts and monthly bills?
This is perhaps the biggest consideration when deciding whether an IVA is the right solution for you and your finances.
Your eligibility will be based on how much you can afford to pay towards your debt. An IVA consolidates all of your debt payments into one affordable amount, however, you must be able to show that you can pay at least £85 per month.
When applying for the debt solution you will take part in an income and expenditure check. This allows the insolvency practitioner (IP) who will manage your proposal to determine how much you are capable of paying each month on top of all of your combined bills and any additional debts.
If 75% of the people and companies you owe money to agree to the proposal by your IP you’ll then begin paying one payment towards your debt each month. This can make monthly bills more manageable whilst still repaying the debts that you owe.
How will an IVA affect my credit rating?
Details of your proposal are put on your credit reference file, and also entered into the public Individual Insolvency Register for six years after approval, and as such, an Individual Voluntary Arrangement (IVA) will affect your credit rating.
The agreement will become part of your credit history and will remain on your credit file for six years.
However, it’s important to note that this is the case for most debt solutions and your credit score will likely already have been affected by being in debt in the first place.
Although an IVA does negatively affect your credit rating at first, it also offers the opportunity to start afresh, allowing you to stay on top of all future bills which will improve your credit rating.
How will an IVA impact my reputation?
Your IVA will be recorded in the Individual Insolvency Register which is available to the public.
Anyone who deliberately looks up your name in the register will see that you are insolvent but it won’t be broadcast in any other way.
So unless someone actually has cause to already believe you are in debt and checks the register, it is unlikely that anyone will ever know.
How will an IVA affect my ability to get loans in the future?
While repaying debt with an IVA, you must abide by strict rules when it comes to borrowing money such as loans or credit cards.
If you need to borrow less than £500, you can do so without asking permission from your insolvency practitioner (assuming the loan is approved by the creditor). For amounts in excess of £500, you need to get written permission from your insolvency practitioner. The only exception is if the loan is needed to pay off utilities.
However, as the IVA affects your credit rating it’s always important to keep in mind that it’s unlikely you’ll be approved for short-term loans.
If this is a concern, remember an IVA consolidates your monthly bills and reduces the amount you owe so that you can actually keep up each month meaning you’re less likely to need a loan.
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Can you lose your home with an IVA?
Owning your own property is something that’s taken into consideration when you apply for an IVA. The IP will consider the amount of equity that would be available to you if you were to sell your home and pay off your mortgage, usually checking if the amount would be enough to repay your debts in full.
Typically, all properties are included within an IVA unless there are special circumstances, which means that that your share of the equity in the property will be reviewed as part of your arrangement.
It is important to say right at the start that you will never be required to sell your home as part of your IVA.
In some circumstances, you may be asked to attempt to release some of the equity in your property but there are limits on how much you will be asked to release. We call this the “available equity”.
The available equity in your property will be calculated by taking the value of your property, discounting it to 85%, and then deducting any mortgage and borrowing secured on it. If that figure is less than £5,000 at the outset of your IVA, you will not be required to undergo any further review during your IVA and your IVA will simply last for 60 months.
If the available equity in your property is more than £5,000 at the start of your arrangement but you have less than £100 of disposable income left each month or are over 60-years-old (regardless of disposable income), or, then your arrangement will last 72 months with no further review of your equity.
If the available equity is more than £5,000 at the beginning of your IVA, you are under the age of 60 and have more than £100 of disposable income each month, your arrangement will last 72 months and there will be a review of your equity in month 54.
At this point, a further valuation will be undertaken, and an up-to-date mortgage/secured loan balance will be requested to establish the available equity in your property, again based on the 85% limit.
How will an IVA affect my car and other assets?
You will typically be allowed to keep your car provided that it is required for work or family transport and the value isn’t excessive.
With regards to other assets, you should note all household and domestic goods are excluded from the agreement by law. These are deemed as essential items and you will never be asked to sell these:
- Electrical items such as computers, phones, televisions
- Furniture and fittings
- Cooking equipment and white goods
- Medical aids (e.g. mobility scooters and wheelchairs)
- Children’s items
When setting up your agreement you should, however, be sure to make your IP aware of any assets you own to help them and your creditors make an informed decision about the payments you can afford. Don’t forget to mention:
- Insurance policies
How will an IVA affect my job?
For most people, entering an IVA will not affect your job.
However, it’s important to be aware that the agreement can affect some types of employment so it’s always important to check if you will be required to tell your employer if you enter an IVA.
If you work in the police or prison service, fire service, are a banking clerk or are in a position of financial responsibility, such as an accountant or solicitor, being in an IVA could impact your job.
If you are self-employed you can continue to operate your business whilst in the IVA but should be aware that ongoing credit with suppliers could become an issue.
How will an IVA impact my budget?
An IVA is designed to make managing your monthly budget much easier.
Put simply, your unsecured debts can be consolidated monthly payment meaning that you could pay as little as £85 per month towards various debts. This then allows you to manage your remaining funds for current bills which cannot be included in the debt solution and living expenses.
If you find yourself running out of money quickly after payday and turning to credit or your overdraft to get by each month, an IVA can have a positive impact on your budget.
Is getting an IVA a good idea?
There are a host of benefits to an IVA both financial and personal.
- No up front fees
- If your proposal is approved by 75% of creditors, those who vote against your proposal or don’t vote are still bound by it.
- No more pressure to pay what you can’t afford from lenders in the agreement
- Interest and charges are frozen
- Make one affordable payment each month which is distributed to creditors on your behalf
- You’ll never be forced to sell your home
- All remaining debts at the end of your agreement will be written off using government legislation
Does an IVA ruin your life?
This is a common question and while there are many benefits to an IVA it’s important to be aware of the disadvantages of the agreement. While these won’t ruin your life, you should take them into consideration.
- Not all debts can be included. For example, student loans, child support and maintenance, magistrate court fines and social fund loans are excluded from an IVA, but an allowance can be given to enable you to continue repaying these
- Spending restrictions are put in place
- Homeowners may need to remortgage to release equity in the last year of the agreement. If you can’t remortgage, your arrangement could be extended by up to 12 months
- Creditors may not approve your IVA.
- Any windfalls and inheritance money over £500 received during the term will be included in the arrangement
- If your circumstances change your IP can ask creditors to agree to an amended offer, however, if this isn’t approved your IVA could fail.
- If your IVA fails, it could lead to you being made bankrupt.
- IVAs are recorded on the Insolvency Register, which is a public register.
- An IVA can affect your credit rating and remains on your credit file for six years after it is accepted
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