If you’re struggling with unaffordable debt, you may have considered entering into a formal debt solution, such as an IVA, to help you repay what you owe. But is an IVA worth it?, or is another debt solution better suited to your financial situation?
There are several factors you must consider before committing to an IVA, such as your monthly affordability and future plans, and you must ensure you’re entering an IVA for the right reasons.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors (the individuals or businesses you owe money to) to repay your debt through a series of affordable monthly payments.
Once your IVA has been approved, it will be managed by an Insolvency Practitioner (IP), who will deal with your creditors on your behalf and be your first point of contact for any questions or queries you may have during your arrangement.
IVAs can be used to repay a wide range of unsecured debts, including personal loans, catalogues, and rent arrears, but student loans, mortgage arrears, and child support arrears can’t be included.
When you come to the end of your IVA, any remaining debt will be written off and – as long as you don’t have any other debts – you will be free to get on with your life.
How much debt do you have?
How long does an IVA last?
Typically, an IVA will last a total of five years (60 months). This is to allow your creditors to recover as much of the unsecured debt as possible while keeping your monthly payments as affordable as possible alongside any other financial obligations you may have.
However, your IVA may be extended by an extra 12 months to allow you to make up for missed payments if you had a payment break, reduced your payments, or were unable to release equity from your home.
Some IPs may also allow you to settle your IVA early by increasing your monthly payments or making a lump sum payment, but there can be early repayment fees or penalties involved.
How does an IVA work?
The IVA process is relatively straightforward with just a few simple steps required to get your arrangement up and running. Here is a rough guide to how an IVA works:
Meeting with an IP
The first step in the IVA process is arranging an initial consultation with an IP.
They will review your financial situation and discuss all your available options to establish whether an IVA is the best solution for you at this time.
During this meeting, your IP should cover all your available options to ensure you make the right decision for your financial situation.
Drafting your IVA proposal
If an IVA is considered a viable option for you, your IP will request some further documentation from you to help them draft your IVA proposal.
This is a document that outlines how much you can realistically afford to repay towards your debt each month and is based solely on the information you provide about your income and expenses.
Once complete, you will be given a chance to look over your IVA proposal before signing and returning it to your IP.
Voting on your IVA
Once you have signed and returned your IVA proposal, your creditors will hold a ‘creditors’ meeting’ or ‘meeting of creditors’ to review and vote on the proposed terms of your arrangement.
For your IVA to be approved, the creditors to which you owe 75% of your total debt must agree that it can go ahead as planned.
Even if 25% of your creditors disagree, the IVA will still go ahead and 100% of your creditors will be legally bound to the arrangement until you make your final payment.
Entering into your IVA
Once your IVA has been approved, all interest and charges on your debt will be frozen and your creditors must stop contacting you about the money owed. Usually, your first IVA payment will be due within six weeks.
After making an affordable monthly payment each month for the agreed length of time (usually five years), you will be discharged from your IVA and your remaining debt will be written off.
How will an IVA affect my credit rating?
When you enter into an IVA, it will be visible on your credit file from all of the main credit reference agencies (Experian, Equifax, and TransUnion) for six years.
During this time, your credit rating will be automatically lowered and you may find it difficult to be approved for further credit, such as a mortgage, loan, bank account, or phone contract. This is because a low credit score indicates you have struggled with debt in the past.
However, it is worth noting that any missed payments that led to you needing an IVA in the first place will also be visible on your credit file and will have already dragged your credit rating down.
So while an IVA can have an immediate impact on your financial health, your credit score will only be temporarily reduced and there are various steps you can take to rebuild your credit score during and after your arrangement.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Will an IVA affect my partner?
Previously, credit reference agencies based credit score on the financial health of everyone living at the same address. This meant that, if you had a poor credit score, your partner’s was also affected.
Thankfully, this is no longer the case and the only way your partner’s credit will be affected by your IVA is if you share financial accounts, such as a joint bank account, or have joint debts as this creates a direct financial link between you and your partner.
Furthermore, your partner won’t be informed of your IVA by a third party and you’re not legally required to let them know that you’ve entered a formal debt solution. However, being open and honest about your financial situation can provide you with some much-needed support during the debt repayment process and ensure your IVA journey is as stress-free as possible.
What factors do I need to consider before an IVA?
Before you enter an IVA, there are certain factors you must consider to ensure it’s the best option for your financial situation at this time. Here is a guide to the key factors to consider if you’re wondering whether an IVA is worth it:
Your monthly affordability
When your IP is setting up your IVA, your income and expenses will be taken into account to determine how much you can realistically afford to repay towards your debt each month.
This means you’ll never be made to pay more than your financial situation allows and won’t be left out of pocket once essential expenses, like housing, utilities, and food, have been covered.
So as long as you can repay a minimum of 25% of your total debt over the course of your arrangement, you should be able to afford your monthly IVA payments alongside any other financial obligations.
Your debt load
IVAs are designed for individuals struggling with a range of unsecured debts, including credit cards, personal loans, and overdrafts.
There is no minimum or maximum debt level required for an IVA but because there are fees involved, it is usually only recommended for individuals with several creditors and debts of over £10,000.
Furthermore, while an IVA can help you repay most unsecured debts, secured loans, student loans, child support, and mortgage and rent arrears must be repaid separately.
Your future plans
Because most IVAs last five years, you must consider whether your monthly payments are likely to impact any major events you have planned, such as getting married, starting a family, or sending your child to university.
Being in an IVA won’t stop you from doing any of these things, but you’ll be expected to put most of your disposable income towards your arrangement, which can make it difficult to save.
Additionally, you’ll also need to consider whether you’re able to commit to five years’ worth of monthly payments and a poor credit score for six years.
Your credit score
When you enter into an IVA, it will be listed on your credit file and negatively affect your credit score for six years. This means that, if your IVA lasts for the standard five-year term, it will still be visible on your credit record for another 12 months after your arrangement comes to an end.
This can make it difficult – if not impossible – to get a loan or mortgage during this time as lenders will be able to see you have struggled to make repayments in the past.
However, it is worth noting that your credit score will already be affected by the missed payments that led to you needing an IVA in the first place.
Your assets
Unlike some debt solutions, like bankruptcy, your assets will be protected throughout your IVA. So even if you can’t afford your monthly repayments, any high-value items you own – such as your home and your car – are safe and can’t be seized to repay the debt.
The only time your assets will come into play is during the final few months of your IVA when you may be asked to release equity from your home to go towards your debt. This is to ensure your creditors can recover as much of the debt as possible before your IVA ends and your remaining debt is written off.
This may sound daunting, but you won’t be expected to increase your mortgage to more than 85% of the total value of your home and the mortgage will be reviewed against your finances beforehand to ensure it’s still manageable and affordable for you.
Your reputation
As well as being added to your credit file, your details will also be visible on the Individual Insolvency Register (IIR) for three months after your IVA comes to an end. This is a public database from the Insolvency Service that records all active insolvencies, including IVAs.
However, while the register is publicly available, it is usually only accessed by employers, landlords, and credit reference agencies when running a credit check on you or checking your recent credit history.
So as long as nobody has any reason to suspect you may be in debt, there’s no reason why a friend, family member, neighbour or colleague should ever be informed or find out about your IVA.
Your spending habits
During an IVA, you’ll be placed under certain spending restrictions and expected to follow a strict budget to ensure you can be released from your arrangement at the end of your five-year term.
For example, if you want to borrow more than £500 at any point during your IVA, you must get permission from your IP. Similarly, if you receive a financial windfall, such as an inheritance or lottery win, you must tell your IP who will more than likely instruct you to put a large percentage of it towards your debt.
Understanding these spending restrictions can help you know what to expect from your IVA and prevent you from being surprised by any limitations placed on your finances.
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
What are alternatives to an IVA?
An IVA can be an effective solution to help you tackle your unsecured debts, but there are other debt solutions available. Here is a guide to some of the most common IVA alternatives:
Debt Management Plan
A Debt Management Plan (DMP) is an informal debt solution that involves repaying your non-priority debts in full through a series of monthly payments. Depending on your total debt level, this could take anything from five to ten years.
Some of the debts that can be included in a DMP include personal loans, credit cards, and overdrafts, but rent arrears, criminal fines, and income tax can’t be included.
Because a DMP isn’t legally binding, you also don’t have to make payments for a minimum period and can leave the arrangement at any time if it no longer suits you. However, this also means your creditors don’t have to stick to the terms of the arrangement and interest and charges aren’t frozen, so you could end up paying more in the long run.
Debt Relief Order
A Debt Relief Order (DRO) is a debt solution designed to help you repay smaller debts of £30,000 or less. Most DROs last a year, after which time your remaining debts will be written off and you’ll be free to get on with your life without the burden of unaffordable debt.
Like DMPs, not all debts can be included in a DRO, and criminal fines, student loans, and social fund loans are just some of the debts that aren’t covered. However, credit cards, overdrafts, and personal loans can be included.
DROs are often viewed as a less serious alternative to bankruptcy for those on low incomes with very few assets and work by freezing your debt for a year and writing it off if your circumstances don’t improve after this time.
Administration Order (AO)
An Administration Order (AO) is a legally binding agreement between you and your creditors to repay your debts over an agreed period. This means it must be approved by the court and your creditors must stick to the terms outlined in your arrangement until your final payment has been made.
AOs require you to have multiple debts, a maximum debt level of £5,000, and an unpaid County Court Judgment (CCJ) or High Court Judgment (HCJ). There may also be fees required for each repayment, but this won’t be more than 10% of the total amount you owe.
Because you’ll be expected to repay your total debt with an AO, it will last for as long as it takes for you to repay the debt in full. This depends on your total debt balance and how much the court decides you can repay towards your debt each month.
Conclusion
An IVA is a popular debt solution that can help you repay what you owe through a series of monthly instalments based on what you can comfortably afford.
But while an IVA may be able to help you deal with your unsecured debts, there are other debt solutions available. Before making an informed decision, you must review all your available options and, if necessary, seek advice from a financial expert.
Whether or not an IVA is worth it depends on your financial situation, total debt level, and ability to make monthly payments towards your debt.
