Coming to the realisation that you need to deal with your debt is hard enough in itself. When you then have to choose the best solution for repaying what you owe, things can become even more complicated.

Each debt solution comes with their own pros and cons, and an Individual Voluntary Arrangement (IVA) is no different. In this article, we take a look at some IVA pros and cons for you to consider – from offering you protection from creditors, to limiting your disposable income for 5 years or more.

Before we get to the IVA pros and cons, though, let’s first take a look at what an IVA is.

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What is an IVA?

An IVA is a legally binding agreement between you and the companies or people you owe money to – your creditors. Available in England and Wales, as well as Northern Ireland, it allows you to pay back your debt over five years by taking advantage of a single monthly payment.

One of the major advantages of an IVA is that all interest and charges on your debt is frozen for the length of your agreement, and you cannot be chased for payment. This allows you some breathing room to pay off what you owe without being hassled by creditors.

By undertaking an IVA, however, you’re also agreeing to have your information listed on the Insolvency Register. The Individual Insolvency Register will carry the details of your agreement, and allows people to search your financial information for free – although it will only usually be accessed by creditors.

How does an IVA affect your life?

While there are huge upsides to using an IVA – not least the ability to write off unsecured debts and work towards a debt free future – it is a big commitment. IVAs typically last 5 years. During that time, your budget will be restricted to living expenses and not much else while you make payment towards your debt.

To make sure you have all the information you need to make an informed decision, we’ve outlined some IVA pros and cons for you below.

What are the advantages of an IVA?

Like all debt solutions, an IVA comes with pros and cons. First, we look at some of the IVA pros.

You can freeze interest and charges

As a debtor (someone who owes money to a person or company), one of the most difficult aspects of repaying your debts is dealing with interest rates, which can more than double the amount you owe.

If you have had trouble with credit cards, for example, you may have enough income to cover the credit you have actually borrowed. Once the credit card provider adds interest, however, it can leave you struggling to meet repayments.

With an IVA, all rates and charges on your debt is frozen from the minute it’s approved. This means you don’t have to worry about your balance going up, which in turn makes settling your debts is a lot easier – not to mention cheaper.

You can make affordable monthly payments

Another advantage of entering into an IVA is that your payments are based on what you can afford. This is worked out by looking at your income, going through all your necessary outgoings, and calculating your payment amount each month based on the difference between the two – your disposable income.

Should your situation change at any point throughout your arrangement, your payments can be adjusted to suit.

You will get legal protection from creditors

An IVA is legally binding. Once it is approved, the companies included are no longer able to take legal action against you, or ask you to make extra payments outside your arrangement.

Should any of your creditors object to your arrangement, your Insolvency Practitioner (IP) will negotiate on your behalf. As long as the debt you hold with creditors doesn’t make up a majority of your overall debt, the IP can overrule creditors’ objections – meaning they are bound to the IVA regardless.

An IVA will protect your assets

Since those you owe money to are bound to your IVA once approved, any assets you own are also protected. Things like your home and your car are considered when setting up your IVA, and you will never be asked to sell them.

However, homeowners may be asked to release equity from their home towards the end of their arrangement.

You can write off unsecured debt you can’t afford

While IVAs cannot write off your debt in its entirety, you can write off a percentage. Once you have made all your payments successfully, any remaining balances will be written off.

You won’t owe a penny to the creditors included, even if you didn’t pay them in full. This allows you to make a fresh start and begin to rebuild your credit score.

What are the disadvantages of an IVA?

Now that we’ve looked at the pros, it’s time to consider the cons. IVA agreements, like any other debt solution, come with certain downsides. Below are some of the main IVA cons.

Your credit rating will be affected

Unlike other debt solutions, your IVA will be recorded on a register that can be viewed by the public – usually for a period of 6 years. For those six years, the record will flag to lenders and credit reference agencies that you have struggled to pay back money owed in the past.

A marker will also be noted on your credit file, which will have a negative impact on your credit rating. A poor credit rating (or credit score) can make it difficult to get credit in future.

You can’t include certain types of debt

There are some debts that you cannot put into an IVA, including:

  • Student loans
  • Child support/maintenance
  • Court fines
  • Social fund loans

You will be expected to continue to pay these throughout your arrangement. This will be accounted for in your essential outgoings to allow you to continue repayments.

You may have to remortgage your home

Being a homeowner is a factor in the setting up of your IVA. While you won’t be forced to sell your home, towards the end of your IVA you may be asked to attempt to release any available equity. This is generally done through a request to remortgage your house.

If you are unable to do this, then your case could be extended for 12 months.

Most new funds will go towards your debt repayment plan

If you become entitled to any form of windfall, like an inheritance, bonus, or settlement above £500, this will be brought into your IVA. It will then be paid out to your creditors to help you pay back more of your overall debt level.

Depending on the amount, this can sometimes be enough for your arrangement to be completed early. If it’s enough to allow you to clear your debts in full with funds leftover, the remaining funds will be returned to you.

Your IVA may fail

Should you not manage to keep up with payments, your IVA could fail, and your Insolvency Practitioner could make the decision to terminate it. If the IP were to bring about the end of the IVA, then you would be responsible for paying back your debt in full.

The creditors included would then be able to contact you again and take legal action for you to pay the balances. Fees and charges may also be added back on to your debts, making the balances higher.

Is an IVA a bad idea?

Whether an IVA is the best form of debt help for you depends on your circumstances. That said, if you owe an amount of money you don’t feel you will be able to repay, you’re avoiding phone calls from creditors, or you just need some more information or advice, we can help.

The team at IVA Plan are IVA pros. They can offer you free debt advice, help you deal with creditors, and find you an agreement that allows you to consolidate all your debts into one monthly payment, while writing off the unsecured debts you can’t afford.

We have a wide range of debt management solutions that could help you write off up to% of your debts.

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