Are you ready to rid yourself of debt problems in 2021? An Individual Voluntary Arrangement (IVA) could be the perfect way for you to get rid of your debt– or it could wreck your financial file permanently. Did you know that an IVA stays on record for 6 years? And that anyone in the world can search the Insolvency Register to see if you have an IVA? Here are all the things you need to consider before agreeing to an IVA to avoid a making a decision you might seriously regret.
What is an IVA?
An IVA (Individual Voluntary Arrangement) is a type of debt solution in which you use an insolvency practitioner (IP) to arrange with all your creditors to pay off your debt using monthly debt repayments over 5 – 6 years. When you use an insolvency practitioner, you will need to pay them a lump sum every month besides for the money they need to distribute to your creditors. An Individual Voluntary Arrangement is widely considered a method to write off your debt as the IP can typically negotiate a minuscule repayment compared to what you were paying before. However, an IVA affects your credit rating and stays on your credit record for six years.
How does an IVA work?
Suppose you owe money to six different parties – three credit cards, two store cards and a bank overdraft, and it all adds up to £100,000. You’re juggling the repayments, trying to make the minimum on each, sometimes failing, and seeing the amount you owe increase and your credit score get ever more perilous.
With Individual voluntary arrangements , the insolvency practitioner (IP) first groups together all the debt you owe to the various creditors. Together, you work through your finances to find out how much you can afford to pay each month over the set period of typically five years. Let’s say it’s £500. The consultant then reaches out to each creditor, explains the situation and divides the £500 per month accordingly. The monthly payment is calculated in a way that you can still pay your priority bills while paying off the debt. Yet it will require some budgeting. As the IP usually negotiates with creditors to get part of your debt written off, you will be debt-free after five or years of monthly payments.
Sounds simple – right? Not really. The next 5 – 6 years will be hard. But more on that later.
How much does an IVA cost?
There are two parts of IVA costs:
- The cost of hiring the IP
- The monthly payment you will need to make to cover the debts
Insolvency Practitioners charge a lot for their services. The average setup fee of an IP is £5,000. With many IPs, you pay this amount to apply for an Individual Voluntary Arrangement. If your IVA gets rejected, many companies won’t refund your money. You will be back to square one with all your debt, and without the £5000 fee you paid to the IP.
If you do get approved, the IP will continue to charge a hefty fee for their services. In one case, someone paid £6000 towards their IVA, yet only half of it went to cover their debt, and £3000 went to pay the IP and the IP’s other ‘costs’. Granted, for vast sums of debt, it may still be worth it.
Be aware though, that although IPs tout their 90% debt write off, in truth, you won’t be seeing that many savings. Even if your creditors agree to write off that much debt, you probably won’t hear of it as the IP might charge you the same amount and absorb the extra money as a monthly fee. (Source: http://www.debt advice foundation.org/questions/what-is-an-IVA).
It is a good idea to reach out to a few IPs and get quotes from them all. It is best to find an IP that will give you a free or reduced initial consult and only charge you the hefty initial fee once you have entered an IVA. This will save you some money.
Free IVA help?
There are debt charities such as the Debt Advice Foundation that offer IVA help. However, there is no genuinely free IVA help as there will always be a fee for arranging an IVA – whether through a commercial agency or a charity. You won’t save much using an IP from a charity instead of a commercial agency as an IVA fee structure regulates IP fees. However, charities might be more altruistic than a for-profit debt help agency.
Why you should never use a Debt Management Company to set up an IVA
To get an IVA, all you need is an IP, so using a debt management company as a go-between is a waste of money. A debt management company might even charge you additional fees on top of what the IP is already charging.
If you do decide to use a debt management company, then make sure that you make the most of their services by making sure they have explained all the IVA alternatives to you before deciding that an IVA was your best debt solution. Otherwise, if you go to the debt management company asking to get an IVA, the debt management company might simply refer you to an IP and charge you for the services they provided through the referral.
Individual Voluntary Arrangements: Pros and cons
In the above situation, the debt looks like it will just keep rising forever, but with an IVA, it can be all gone and forgotten in five years. Of course, £500 per month for five years adds up to just £30,000, but creditors are willing to write off the rest, as getting 30p back for every pound is better than getting nothing, or going through the expense and hassle of pursuing you through the courts.
Another advantage of IVA is that you can write off the debt. If your debt is under £60,000, your average debt write-off is between 50% and 60%, which means that up to £30,000 of debt can be written off. Some Individual Voluntary Arrangement providers advertise debt write off up to 90% yet those are rare.
Still good? Get ready to hear the disadvantages:
Disadvantages of Individual Voluntary Arrangements
The first distinct disadvantage of an Individual Voluntary Arrangement is that all the records are public. This means that anyone can find out that you did an IVA by searching the Insolvency Register.
The second significant disadvantage is that the monthly repayments you commit to when setting up an IVA are a 5 – 6-year legal commitment. These payments are rather unforgiving and offer very little flexibility.
How badly does an IVA affect credit rating?
For the six years following an Individual Voluntary Arrangement, your credit score will be bad. Even once you are out of the IVA, it will remain on your credit file for six years. On the other hand, by the time many people consider an IVA, they are already behind in bills and are already causing lots of damage to their credit score by missing payments. In this case, a six-year freeze on credit by the IVA process might even improve their credit rating. Ultimately, by using a debt solution such as an individual voluntary arrangement, you can put the debt behind you and start to rebuild.
Can you borrow money while in an IVA?
If you are in an IVA, you cannot borrow more than £500 without getting permission from your IP. This means that while you are in IVA, you can’t get a loan, credit card, mortgage or any other type of credit. If you need money during the 5-6 year IVA period, you can ask your IP for a payment break. There are not many loans for people with an IVA. You can probably get a payday loan that is under £500 without having to get permission from your IP. Even if you do get approval from your IVA supervisor, it will be challenging to get approved as you will have bad credit at least for the duration of the IVA. You cannot even borrow money from family and friends above £500! Moreover, you might also need to get permission from your IP to join a salary reduction or cycle to work scheme!
If I get an IVA – will I lose my job?
Maybe. Losing your job is a considerable risk of IVA if you work in the legal, banking or financial services sector. It is essential to check your contract to make sure there is nothing in it barring going insolvent.
Alternatives to IVA – Other debt solutions that write off debt
A DMP (Debt Management Plan) is better than an IVA in that it’s private, does not risk job loss and offers more flexibility. An IVA has an advantage over the DMP in that it can write off on average 50-60% of the debt, but at the same time, an IVA is expensive, and a half of one’s payments go to IP fees. Meanwhile, a DMP can be completely free if done through a debt help charity.
An IVA is a legal agreement which binds creditors so that they can’t make changes to the plan, contact you or pursue legal action. However, this also makes it harder for you to get flexibility and understanding during your IVA. With an IVA, you can only change your payments by up to 15%.
What’s better, DMP or IVA?
|Debt write off||Creditors usually write off some debt as part of the IVA Usually 50-60%||None. With a DMP you pay back in full.|
|Confidentiality.||Public. Details of your IVA will be posted on the individual insolvency register.||Private. Unless told, no one will know about it.|
|Legally binding||Creditors cannot make changes to the Individual Voluntary Arrangement after signing.||Creditors can make changes throughout the plan duration.|
|Length||Shorter as limited to 5-6 years. Usually five years, yet could be six years if a remortgage was required but you don’t own property.||Usually longer as no set length – could be up to 10 years of payments. This is because very little debt is written off and one must pay back the debt in full, which takes more time.|
|Interest and Charges||No more interest or charges after IVA is signed.||It is not guaranteed. Creditors can continue to charge interest yet may freeze interest and charges as a token of goodwill.|
|Flexibility||Less flexible than DMP. If you want to change your payments by more than 15%, you will need to get permission from creditors.||More flexible than an IVA. You can change the amount you pay monthly when necessary.|
|Cost||Not free. Will need to pay for an IP even if you use a debt help charity||Free through a debt help charity. You can also try make a debt management plan yourself.|
|Creditor contact and legal action||None.||
Creditors might still contact you and may even pursue
Individual Voluntary Arrangement vs Bankruptcy
IVA is only better than bankruptcy in the case of a secured loan, where declaring bankruptcy will cause you to lose your collateral. An IVA is an alternative to bankruptcy as it does not put your home at risk, but it is also a 5-6-year long haul during which you can’t get access to credit like loans while still needing to meet monthly payments. A bankruptcy on the other hand, is discharged within a year (although you might need to make contributions from your income for 3 years). Therefore, if you can’t afford the debt of an unsecured loan, it is better to stick with bankruptcy.
If you are a homeowner, there is a chance that your home might be remortgaged in the last six months of the 5-year IVA term to release equity. This is particularly relevant if you have an equity of more than £5,000.00. Yet, if a remortgage is required but does not happen, then you may make IVA payments for an extra 12 months instead.
It should also be noted that both IVA and bankruptcy might cause you to lose your job and/or prevent you from getting a job in the future. This is especially relevant to those who work in law, accountancy, financial services and banking sectors for whom there might be a clause in their contract forbidding insolvency like IVA or bankruptcy. The employment laws of bankruptcy are more strict, so make sure to read this article if you have a senior role, handle financial matters or work in law, accountancy, financial services or banking.
After an IVA:
When you complete your Individual Voluntary Arrangement, you will be issued an IVA Completion Certificate by your Insolvency Practitioner (IP). Your IP will also inform your creditors that the debt has been cleared.
The Insolvency Service receives a copy of this certificate and updates the individual insolvency register accordingly. Once your details have been removed from the Insolvency Register, you should update credit reference agencies that your IVA has been completed successfully. Hopefully, you will see your credit rating improve. However, in some ways, you will be starting from scratch.
It will take six years after the Individual Voluntary Arrangement for it to not appear on your credit file. It also might be hard to get a loan after an IVA as some lenders might ask if you ever had an IVA or been bankrupt in the past. Even if they don’t ask about it, it might still be hard to get a cheap loan after the IVAs completion as you might need to rebuild your credit score if you don’t want to settle for a bad credit loan!
Is an Individual Voluntary Arrangement worth it?
In summary, an Individual Voluntary Arrangement is only a good idea if:
- You can commit to a rigid budget for five years
- It is for a secured debt (which you would risk losing if you had to declare bankruptcy)
- You have a substantial debt (usually over £15,000)
- You have two or more creditors
- Your income is regular and stable