IVAs are the right debt solution for many people, but some financial advisors worry that customers are sometimes pressured into taking on an IVA without knowing exactly how they work, and what other options are out there.
Below, we explain some of the most common myths associated with IVAs, and help you to decide whether an IVA is the right choice, or if you would benefit more from a different solution.
How IVAs work
IVA stands for Individual Voluntary Arrangement. They are a formal, legally-binding solution to problem debt, which allows you to pay back a portion of what you owe your creditors in reduced monthly instalments, over the course of about five years.
To set up an IVA, you have to contact a qualified Insolvency Practitioner (IP), who will negotiate a reduced repayment plan with your creditors on your behalf. This is calculated based on what you can reasonably afford, after the IP asks you about your income and expenditure.
If your creditors agree to the terms of the IVA, you simply make the agreed-upon payments for five years. At the end of the IVA, any remaining debts you have are written off. In the IVA’s final year, you may be required to remortgage your home and put the funds towards your IVA, but an extra year of monthly payments, or a lump-sum payment, can be substituted instead. During the IVA, your creditors will no longer be able to contact you directly, but must communicate through your IP.
Unfortunately, information about IVAs can be confusing, leading to the emergence of certain myths and misconceptions – here we dismiss some of the most common.
- All of your Creditors have to agree to your IVA for it to go ahead
This is an understandable misconception, but it is not true. If creditors representing 75% of your debts agree to the IVA, then every creditor is bound by it, even if they voted against it. Once the IVA begins, your creditors must also freeze interest and fees on your debts. They cannot contact you demanding further payment, or take legal action against you.
- You cannot take out any further Credit during an IVA
Some people are reluctant to consider an IVA because they fear it could stop them from accessing credit for a long time. There are restrictions on obtaining credit whilst in an IVA, but it is certainly not entirely banned! To borrow more than £500, you will have to gain permission from the IP handling your case, and finding companies to lend to you can be more challenging since they will be able to see you are in an IVA. This will affect your credit rating, since potential lenders can see that you have had trouble repaying debt in the past. However, getting credit is possible – you might consider an alternative to the high-street lenders, such as a credit union.
- If you miss an IVA Payment you will be made Bankrupt
This is another myth which can be very off-putting to people who might actually benefit from an IVA. IVAs actually allow for a reasonable amount of flexibility – if you have been struggling with debt, things are likely to be tight financially, and your IP will take this into account. If you cannot afford your payment for a month or two, you will be able to take a break, and add them to the end of your IVA instead. If your circumstances change for the worse, it is also important to tell your IP as soon as possible. You may be able to arrange lower monthly payments with your creditors. Even if an IVA does fail, you will not automatically be made bankrupt. Your creditors are likely to agree to a new repayment plan rather than petition to make you bankrupt – it is important to get in touch with them straight away though.
- IVAs are always better than Bankruptcy
Bankruptcy does come with certain restrictions which IVAs do not impose, but this does not mean that bankruptcy is never the right solution. For people who cannot afford the long-term monthly payments required by an IVA, bankruptcy can be an alternative which releases them from their debts in a relatively short space of time.
- You must tell your Employer if you get an IVA
In the vast majority of cases, you will not have to tell your employer about an IVA, and can continue to work as normal. There are a few exceptions – you may not be able to hold certain positions in the financial industry, and you may have to disclose the IVA if you work for the Police Service or the Army. If you are unsure whether an IVA could affect your employment, speak to your HR department, or check your contract of employment.
Who should consider an IVA?
To be eligible for an IVA, you do have to meet certain criteria. You must:
- Have two or more creditors
- Have at least £6,000 of debt
- Live in England or Wales (for Scottish residents, a Trust Deed is a similar solution)
- Be able to afford monthly contributions, usually of at least £85
If you have a lower level of debt, an informal solution such as a Debt Management Plan could be a better solution. Because DMPs are not legally binding, they will have less of an impact on your credit score, and not limit your access to further credit. DMPs also involve making reduced monthly payments to your creditors. However, unlike with an IVA, you creditors can still contact you, and you will have to repay the full value of what you owe. Creditors may agree to freeze interest and fees on your debts, but this is by no means guaranteed.
For more on the truth about IVAs, and to find out whether one could be the right solution for you, click here.