If you are suffering from significant financial problems entering into an IVA can be a great way to clear your debts and get your finances back on track.
Since being introduced in 1986 Individual Voluntary Arrangements have become one of the most widely used solutions to consumer debt problems in the UK. Their popularity is due to the many advantages they offer over other available debt solutions such as debt management plans or bankruptcy.
However they also have a number of disadvantages that should be taken into account when considering whether it will be the best option for you and your circumstances.
Organising an IVA can have benefits for you and also in some cases for your creditors.
Have some of your debts written off
In an IVA your creditors agree to accept payment of a percentage of the outstanding debt with the remaining balance being written off. Although the amount written off will vary from case to case it is sometimes possible to write off as much as two thirds of what you owe.
Consolidate your debts and reduce your repayments
When entering into an Individual Voluntary Arrangement your debts are consolidated into a single regular payment. Instead of making payments to your creditors you make them to your IVA provider who will distribute the funds on your behalf.
Starting an Individual Voluntary Arrangement will also see a reduction in your debt repayments. The amount you pay back each month in an IVA is based on what you can afford on your current income. Reducing the amount you pay each month will help you to get your finances back on track.
Become debt free in a fixed period of time
The legal maximum length of time of an IVA is seven years. In reality however the vast majority of IVAs will run for five years or less. By entering into an IVA you know that you will be free from debt in the length of time agreed at the start of the arrangement.
IVAs are legally binding and so providing you keep up with your repayments your creditors are bound by the terms of the arrangement.
Once the Individual Voluntary Arrangement starts all interest and charges relating to your debts are stopped. This will mean that the amount you owe doesn't increase.
Avoid bankruptcy and legal action
Any legal action taken by your creditors, including bankruptcy proceedings, is stopped once the IVA is approved. Your creditors are also no longer allowed to contact you directly.
There are no additional fees
In an IVA typically two fees will be charged. The nominee's fee is payment for the work done in setting up the arrangement. A supervisor's fee then covers the costs incurred in managing the IVA over its duration. Both of these costs are however included in the monthly repayments meaning that you will not be charged any extra fees. The exact amount of these charges is agreed between your Insolvency Practitioner and your creditors in advance.
Benefits to your creditors
The net returns to your creditors in an IVA are often higher than would be the case if you were to instead become bankrupt. Costs associated with the arrangement are also often lower than insolvency fees.
Individual Voluntary Arrangements are legally binding
Although the fact that an IVA is a legal agreement between you and your creditors can be seen as a positive there are occasions when it will be a drawback. Since it is a formal arrangement you are committed to sticking to its terms. In the event that you can no longer keep up with the payments then it is possible the IVA will fail with the most likely outcome being bankruptcy.
IVAs are less flexible than a Debt Management Plan
In a Debt Management Plan there is a large amount of flexibility and payments can be altered when necessary. This is not the case in an IVA where the size of repayments is agreed from the start and can be difficult to change. In some cases IVA payments can be changed however this is very much dependent on circumstances.
Individual Voluntary Arrangements have a strict qualifying criteria
Even if you have major debt problems there is no guarantee that you will qualify for an IVA. IVAs are only suitable for people with large amounts of debt and only certain types of unsecured debt can be included. A further issue is that at least 75% of your creditors need to approve the IVA for it to go ahead. This means that if you owe more than 25% of your total debt to one creditor, and this creditor votes against the IVA proposal then it will fail.
An IVA will affect your credit rating
The Individual Voluntary Arrangement will be noted on your credit file and will remain there for the duration of the agreement. This means that it can be a number of years before you can start to improve your credit rating. It should be noted however that other alternatives to IVAs such as bankruptcy will also impact on your credit rating.
Royal Exchange provides specialist advice on Individual Voluntary Arrangements and all other personal debt solutions. For more information about the advantages and disadvantages of IVAs or any other questions about solving your debt problems contact us today.
Simply call us on freephone 0800 028 4422 or complete our enquiry form and one of our counsellors will call you back.
To find out if an IVA is the right option for you use our debt solution finder.