Individual Voluntary Arrangements (IVAs) - have you seen the adverts for debt solutions? Sounds like an easy and straightforward way to wipe your debts and make a fresh start. However, the reality can be quite different. There are major drawbacks and often unexpected long-term consequences.
Don't forget that advertising is very expensive and these companies have to pay for those. Those firms are advertising to make money out of you. Martin Lewis at Money Saving Expert says “While in the short term their plans will make your payments lower, in the long run it'll cost you dear. Avoid them. Don't touch them. Don't go near them.”
There are some circumstances where an IVA can be the best solution, but there are often much better solutions with less impact on your credit history and ability to borrow again. It is vital to get free, impartial advice from a reputable source to help you see the full picture and understand what options best suit your situation.
What are IVAs?
IVAs are a legally binding form of debt management that work by freezing your debt for a fixed period, usually 5-6 years. During that time you must commit to paying a monthly amount towards your debt. After the fixed period, any money you still owe will be cancelled but only if you have made all your agreed payments and not been in breach of your agreement.
What problems can arise with IVAs?
An IVA is arranged through firms called insolvency practitioners. Unfortunately some are motivated by the fees they will earn than your best long-term interests.
IVAs are not free. There are fees, we regularly see £4,000 to £5,000 being charged. Your monthly repayment will be set to cover both the amount owed to the lenders and your IVA provider’s fee. But the IVA fees are paid first. So many times we see thousands being paid, but that only reduces the fee, and has little impact on reducing your debts.
IVAs also include conditions that will affect your financial independence. You may be asked to sell your car or other personal items of value. Any savings will be taken in and if you receive an unexpected gift or an inheritance you may have to pay all of it into the IVA. You may even have to remortgage your home to cover some of your debts.
Your IVA could affect your ability to borrow for up to 12 years. The arrangement will appear on your credit history and make it difficult or very expensive to obtain such basics as phone contracts and credit cards. There may be legal restrictions to stop you borrowing even from family or friends or take up salary benefits like cycle to work schemes and season ticket loans. In most cases you will need to get written permission from your insolvency practitioner.
What if you struggle to make your payments or your circumstances change?
If you fail to keep up your IVA repayments, your insolvency practitioner will send you a notice of breach and give you up to a month to respond and put things right. But if you don’t contact them or can’t make up the payments they will end your IVA. You will still owe your creditors who can pursue their debt. The debt may be higher than you expect because the majority of payments to this point have gone to your IVA provider as fees. Your IVA provider may also make you bankrupt.
We often see people who have chosen to get into an IVA without fully understanding all the consequences. IVAs and bankruptcy should always be seen as a last resort and in many cases are not needed, as there may be other steps you could take with a better long term solution. Do some research and seek help from a free impartial not-for-profit debt advisor.
What could you do instead?
- Talk to your creditors first. They will prefer to work with you to find an achievable solution. This may include a payment holiday, rescheduling the debt, freezing interest. Once an IVA is in place your creditors will no longer be able to help in this way. So pick up the phone or send them an email
- Maximise your income. Change job, ask for a payrise (nicely), are you getting all the benefits you qualify for? Check our benefits calculator - you may be surprised with what your household is entitled to.
- Cut back - cheaper products, shop around for the best deals, look for free products and services, talk to friends about how they reduce spending.
- Debt consolidation - it may be cheaper by restructuring your loans into a single loan with lower monthly repayments. Derbyshire Community Bank will be happy to talk to you about this.
- Consider selling your car or downsizing your home. This may appear drastic, but may help you to pay off your debts and rebuild your financial security sooner than you could break free from the restrictions of an IVA.
- Seek independent free advice from one of the not-for-profit debt advisors that will act in your long-term best interests and not motivated by making money out of you.
- Build up a savings pot - saving a small amount regularly provides a safety cushion if an unexpected bill arrives - avoids getting into more debt. Derbyshire Community Bank will be happy to talk to you about this.
- In a small number of extreme cases, a formal debt solution such as IVA may be the only way forward. But that step should never be taken lightly and never before taking free independent advice.
This article is for general information only and does not constitute financial, legal, or any other form of advice.