An Individual Voluntary Arrangement (IVA) can be an effective way to manage debt, but it’s important to understand the pros and cons before deciding if it’s right for you. Here’s an overview of the advantages and disadvantages of an IVA:
- Protection from creditors: Once an IVA has been agreed upon, creditors are legally required to stop pursuing the individual for payments.
- Structured repayment plan: IVAs provide a clear, structured plan for repaying debts, making it easier for individuals to manage their finances and become debt-free.
- Avoid bankruptcy: An IVA allows individuals to avoid bankruptcy, which can have severe consequences for their credit score and future borrowing.
- Financial commitment: IVAs typically require individuals to make regular payments towards their debts for a period of several years, which can be a significant financial commitment.
- Credit score impact: Entering into an IVA may impact an individual’s credit score, as it will be noted on their credit report for a period of six years.
- Eligibility criteria: IVAs may not be suitable for everyone, as they typically require individuals to have a stable income and a certain level of debt to qualify.
Ultimately, whether an IVA is the right choice for an individual will depend on their specific financial circumstances and goals. It’s important to carefully weigh the pros and cons before making a decision.
What are the advantages of an IVA?
There are many advantages to an IVA these include:
You can freeze interest and charges
One of the benefits of an Individual Voluntary Arrangement (IVA) is that it may be possible to freeze interest and charges on debts included in the agreement. This means that the amount owed will not increase over the course of the IVA, making it easier for the individual to repay their debts.
Freezing interest and charges can also help to reduce the total amount owed over time, as the individual will only need to repay the principal amount borrowed. It’s important to note that not all creditors will agree to freeze interest and charges, and even if they do, there may be fees or penalties involved. It’s important to discuss all options and terms with a qualified professional before deciding to pursue an IVA.
You can make affordable monthly payments
Another advantage is that it allows individuals to make affordable monthly payments towards their debts over a set period, usually five to six years. The amount of the monthly payment is based on the individual’s income and expenses, making it a realistic and manageable option for those with a stable income. This can help to reduce the financial burden of debt and make it easier for individuals to stay on track with their repayments.
IVAs typically provide protection from creditors, as they are legally required to stop pursuing individuals for payments once an IVA has been agreed upon. However, it’s important to note that the monthly payment may not cover the full amount owed, and any remaining debt will be written off at the end of the agreement.
You will get legal protection from creditors
By entering into an arrangement it can offer legal protection from creditors. Once an IVA has been agreed upon, the individual is legally protected from any legal action taken by their creditors, including court action or further charges. This can provide peace of mind for those who have been struggling with debt and are worried about being pursued by their creditors. In addition, IVAs provide a structured repayment plan that can make it easier for individuals to manage their finances and become debt-free.
However, it’s important to note that creditors will need to approve the IVA proposal, and there may be fees or penalties involved. It’s essential to work with a qualified professional to understand the terms of the IVA and ensure that it’s the right option for your financial circumstances.
An IVA will protect your assets
An IVA can offer protection for an individual’s assets, such as their home or car. Unlike bankruptcy, where assets may be sold to repay debts, an IVA allows individuals to keep their assets while still repaying their debts over a set period, usually five to six years. This can be particularly important for individuals who have significant assets and want to avoid losing them due to debt.
It’s important to note that there may be some restrictions on the individual’s ability to use or sell their assets during the IVA period. Additionally, it’s important to work with a qualified professional to ensure that the terms of the IVA are fair and reasonable for both the individual and their creditors.
You can write off unsecured debt you can’t afford
One of the advantages of this type of arrangement is that it may be possible to write off unsecured debts that an individual can’t afford to repay. Unsecured debts are those that are not secured against any assets, such as credit card debt or personal loans. In an IVA, the individual agrees to make affordable monthly payments towards their debts over a set period, usually five to six years.
At the end of the agreement, any remaining debt is written off, providing the individual with a fresh start and the opportunity to rebuild their finances. It’s important to note that not all unsecured debts may be included in the IVA, and there may be restrictions on the types of debts that can be written off.
Read more: What type of debts can be included in an IVA?
What are the disadvantages of an IVA?
As with any type of financial product, it comes with a number of disadvantages these include:
Your credit rating will be affected
An IVA can have a negative impact on an individual’s credit rating. When an individual enters into an IVA, it will be recorded on their credit file and will remain there for six years, even after the IVA has been completed. This can make it difficult to obtain credit during this time, as lenders may view the individual as a higher risk borrower.
Additionally, the individual’s ability to obtain credit in the future may be affected, as lenders may view them as having a history of financial difficulties. However, it’s important to note that an IVA can also help to improve an individual’s credit rating over time, as it demonstrates a commitment to repaying debts and can help to reduce the total amount owed.
You can’t include certain types of debt
While an Individual Voluntary Arrangement can offer relief from some types of debt, there are certain types of debt that cannot be included in the agreement.
Here are some types of debt that cannot be included in an IVA:
- Secured debts, such as a mortgage or car loan
- Court fines
- Child support and maintenance payments
- Student loans
- Debts incurred after the IVA has been agreed upon
- Social fund loans
It’s important to note that while these debts cannot be included in an IVA, they may still need to be repaid separately.
You may have to remortgage your home
In some cases may require the individual to remortgage their home to release equity and make additional payments towards their debts. This can be a condition of the IVA and is known as an equity release clause. The equity release clause will typically require the individual to try to remortgage their home during the final year of the IVA to release a portion of the equity to pay towards their debts. If the individual is unable to remortgage, they may be required to make additional payments instead.
However, it’s important to note that not all IVAs include an equity release clause, and it may be possible to negotiate alternative arrangements with the creditors.
Most new funds will go towards your debt repayment plan
When an individual enters into an Voluntary Arrangement (IVA), most new funds will typically go towards their debt repayment plan. This means that any windfalls, such as an inheritance or bonus payment, will likely need to be used to make additional payments towards the agreed-upon repayment plan.
This is because the individual is committed to making affordable monthly payments towards their debts, and any additional funds can help to accelerate the process and reduce the total amount owed. However, it’s important to note that there may be some exceptions to this rule, and it’s essential to work with a qualified professional to understand the terms of the IVA and the best way to manage your finances during this time.
While it may be tempting to use windfalls for other purposes, such as a vacation or new purchase, it’s important to prioritize debt repayment and stick to the agreed-upon plan.
Your IVA may fail
While an Individual Voluntary Arrangement (IVA) can be an effective way to manage debt, there is a risk that the IVA may fail. If an individual is unable to keep up with the agreed-upon payments, their creditors may reject the IVA, and the individual may be back to square one with their debts.
Additionally, if the individual fails to adhere to the terms of the IVA, such as failing to remortgage their home or not disclosing all of their assets, it may be considered a breach of the agreement, and the IVA may be terminated.
If the IVA does fail, it’s essential to explore other debt management options and work with a professional to develop a new plan for managing your debts effectively.
Frequently asked questions
What is the downside to an IVA?
The downside to an IVA include it usually lasts for five years, it means that is it likely to remain on your credit file for a further year after successfully completing the IVA. As a result, you will probably find it hard to obtain future loans or other financial products.
What are the benefits of IVA?
The benefits of IVA are you will be free of debt in a set time. In an agreed number of years you will be debt free and able to get on with your life. Your creditors will stop calling. Once enough of your creditors agree to it – at least 75% in value of the creditors that vote must do so – an IVA is legally binding.