IVA pros and cons

Since they were introduced as part of the Insolvency Act in 1986, Individual Voluntary Arrangements (IVAs) have helped millions of people deal with their unaffordable debt by consolidating it into smaller, more manageable monthly payments.

However, while an IVA could help you make a fresh financial start, it’s crucial you understand how it could impact different areas of your life – not just your finances. Like every debt solution, there are various pros and cons to being in an IVA and having a full picture of what you’re entering into can help you ensure you’re making the right decision for your circumstances.

What is an IVA?

An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors to repay your unsecured debt in monthly instalments for a set period (typically five years) based on what you can realistically afford.

During an IVA, all interest and charges will be frozen and your creditors will be prohibited from contacting you about the debt or taking legal action against you. This can allow you to focus on repaying what you owe without threatening phone calls or your debt level escalating.

With an IVA, your debts are consolidated into a single monthly payment and sent directly to the person managing your arrangement – called an Insolvency Practitioner (IP). They will then deduct a small chunk of the payment to cover their fees before distributing the remaining amount among your creditors.

IVAs can be used to deal with most unsecured debts, such as personal loans, credit cards, overdrafts, store cards, catalogues, and tax debts. Secured debts, like court fines, student fines, and mortgage arrears, can’t be included in an IVA.

When your IVA comes to an end, all included debts will be written off and you’ll be free to rebuild your finances. Put simply, you’ll only be required to repay a portion of your overall debt over the five years in return for paying what you can each month.

Am I eligible for an IVA?

Before applying for an IVA, it’s important to do your research to determine if it’s the right solution for you. Each provider has their own distinct requirements, but there are some qualifying criteria they must follow.

Generally, you will qualify for an IVA if you:

• Live in England, Wales, or Northern Ireland
• Have unsecured debt owed to at least two creditors
• Can demonstrate that you’re insolvent (unable to pay your debts as they fall due)
• Have enough disposable income to make monthly payments towards your debt

Unlike some other debt solutions, there is no minimum debt level or monthly payment required for an IVA. However, because fees can be high, it’s usually not recommended if your total debt is less than £7,000 or if you can only afford to repay a small amount each month.

Remember, even if you qualify for an IVA, there may be another option more closely suited to your circumstances. If you’re struggling to choose between an IVA and another solution, don’t hesitate to reach out for free debt advice.

How will an IVA impact me?

Having an IVA can impact your life in several ways. Here are just some of the factors you must consider before deciding to enter into an IVA:

Your credit score

From the moment you begin your IVA, it will be visible on your credit file for six years. During this time, you’ll find it challenging to access most forms of credit, such as a loan, mortgage, bank account, or phone contract.

The good news is, the impact of an IVA on your credit score is only temporary and your credit score should start to improve as your IVA ages. There are also various things you can do to rebuild your credit score after an IVA.

Your future plans

Because a typical IVA lasts five years, you must consider whether your arrangement would impact your ability to commit to any major life events in that time, such as moving home, getting married, or starting a family.

Having an IVA won’t necessarily stop you from doing any of these things, but your disposable income will be significantly reduced and you’ll struggle to get a mortgage or loan if you need extra money to cover the cost.

Your reputation

When you enter into an IVA, your details will be added to the Individual Insolvency Register (IIR) until three months after your arrangement ends. This is a public database containing details of all active insolvencies in England and Wales, including IVAs and DROs.

However, while anyone can search for another person’s details on the IIR, it’s usually only accessed by people or companies who need to verify details of your insolvency, such as lenders, landlords, and employers.

This means that, unless anyone goes to the effort of searching for your name on the register, it’s unlikely your friends, family, or colleagues will find out you have an IVA.

Your home

When you apply for an IVA, your assets will be protected and you’ll never be asked to sell your home or car to repay the debt.

However, if you’re a homeowner, your IP might ask you to release some of the equity tied up in your property during the final few months of your arrangement.

This is to give your creditors a final opportunity to recover as much of the debt as possible before your IVA ends and your outstanding balance is written off.

Your job

It’s not a legal requirement to tell your employer that you have an IVA and, in most cases, you should be able to keep your job or even get a new job without any problems.

However, some employment contracts within certain industries (e.g. banking, finance, and law) will contain a clause explaining how being insolvent could affect your job.

This might mean you need to inform your employer of your financial situation, can no longer practice, or must meet certain conditions to be able to continue in your current role.

What are the pros of an IVA?

An IVA is just one of the many debt solutions that can help you tackle unaffordable debt, so why should you choose an IVA over any other debt solution?

Here are some of the pros of having an IVA:

Affordable monthly payments

When Insolvency Practitioners (IPs) draft IVA proposals, they base monthly payments on the amount of disposable income left over after essential costs like housing and utilities have been covered.

This is to ensure you’re repaying as much as you can towards your debt while still maintaining your living costs.

Because your payments are based on affordability, you should never be in a position where you’re expected to pay more than you can afford towards your debt.

Frozen interest and charges

Most unpaid debts accumulate interest over time, but if you’re repaying a debt with an ever-increasing balance, you could end up paying more than you originally owed in extra fees alone.

However, from the moment your IVA is approved, all interest and charges will be frozen so you can focus on chipping away at your debt without worrying about your balance increasing.

This is one of the biggest advantages of an IVA being a legally binding agreement.

No creditor contact

During an IVA, your creditors won’t be able to contact you directly and must communicate with you through your IP.

This means they can’t harass you for the money owed, demand payment from you, or ask you to make payments outside of your arrangement, eliminating the possibility of legal action and allowing you to focus solely on repaying your debt.

However, it’s worth noting that it can take up to three to six months for all creditor contact to cease after entering an IVA.

Remaining debt is written off

The main aim of an IVA is to allow you to repay your debt in smaller, more manageable instalments, ensuring your creditors receive what they’re owed and don’t pursue legal action.

Once you’ve made your final payment, the debts included in the IVA will be automatically written off and you’ll be free to make a fresh financial start.

Even if you’ve only repaid a percentage of what you owe by the time your IVA comes to an end, the remaining debt will still be written off as your creditors agreed to the reduced amount when your IVA was originally proposed.

Your assets are protected

Unlike bankruptcy, your assets will be protected in an IVA. This means that, even if you don’t keep up with your monthly payments, you’ll never be forced to sell your home or car and they’ll never be seized and sold to to repay the debt.

However, if you own your home, your IVA might contain a clause that requires you to remortgage your property to pay off your remaining debt.

This will usually occur around six months before your IVA is due to finish.

What are the cons of an IVA?

An IVA can help you repay your unsecured debt at a rate you can comfortably afford, but it isn’t without its risks. Here are some of the potential drawbacks of having an IVA:

Your credit rating will be affected

When you enter an IVA, it will be added to your credit file for six years. This will automatically lower your credit rating, making it difficult to access most forms of credit, such as a loan, mortgage, phone contract, or bank account.

This also means that, if your IVA lasts the standard five years, you’ll likely have to live with it on your credit file for another 12 months.

The reason your credit rating will be negatively affected is because an IVA suggests that you’ve recently struggled with debt and might not be in the best position to take out further credit.

There are fees involved

While you only need to repay a percentage of your total debt with an IVA, there are a number of additional fees you should be aware of before applying.

This is why most IPs only recommend an IVA if you have debts of £7,000 or more.

However, as all IVA fees are taken directly from your monthly payments, your creditors technically shoulder the cost of any additional fees by accepting a reduced amount.

Your repayment term can be extended

Most IVAs last five years but your arrangement can be extended by 12 months if you miss payments, reduce your payments, have a payment break, or can’t release equity.

This is to give you additional time to make up for the total repayment amount agreed in your IVA proposal.

It can be disheartening to learn that you won’t leave your IVA after five years as expected but this does mean that your IVA will be removed from your credit file at the same time as your arrangement ends.

Your details will be publicly visible

When your IVA starts, it will be added to the Individual Insolvency Register (IIR) and remain there until three months after you make your final payment.

The IIR can be accessed by anyone at any time but it is usually only viewed by lenders, employers, and employers if they have a reason to check your insolvency history.

It might be possible to apply for a Person at Risk of Violence (PARV) to stop your address from being published in the IIR if it would put your personal safety at risk.

Your arrangement can fail

While rare, your IVA agreement can fail if you don’t stick to the terms and conditions as outlined in your proposal or if you don’t cooperate with your IP. It can also fail if you stop making payments or fail to inform your IP of any major changes to your financial situation.

When this happens, you’ll no longer be legally protected by the IVA and will be expected to find another way to repay what you owe.

This also means that your creditors will be free to chase you for the debt, take legal action against you, and add interest and charges.

Is an IVA a good idea?

If you’re struggling with unaffordable debt, you may be wondering whether an IVA is right for you or if another debt solution would be better suited to your circumstances.

Thankfully, there are various checks you can carry out to ensure you’re making the right decision by choosing an IVA.

Here are just some of the questions you should ask yourself if you’re considering an IVA:

• How much total debt do I owe?
• How much can I afford to repay each month?
• Will my job be affected?
• How will my home be affected?
• Will my personal or workplace pension be affected?
• Am I in a position to release equity from my home?
• Do I have any major life events planned?

Before agreeing to an IVA, it’s crucial to weigh up the various pros and cons. For example, while it can help you deal with your unaffordable debt in as little as five years, it can also stop you from getting credit for up to six years.

Whether an IVA is a good idea for you depends on various factors. An IP should be able to review your financial situation, talk you through your options, and advise on the best solution for you.

What happens if I don’t pay an IVA?

An IVA is a formal and legally binding debt solution, which means both you and your creditors are legally bound by the terms and conditions contained in your IVA proposal.

There can be serious consequences for failing to abide by the restrictions of an IVA, but this depends on the specific situation. For example, if you inform your IP that you’re struggling with your IVA payments as soon as possible or even before you miss a payment, they’ll usually be happy to work with you to try and find a solution.

They might let you pay later than usual, reduce your payments for a set period, pause your payments until you get back on your feet, or settle the IVA early.

However, if you continue to miss payments without any explanation, your IVA will fail and you’ll become liable for the debt again. This will also remove any legal protection, meaning your creditors will be free to contact you or take legal action against you to recover payment of the debt.

Can I pay off an IVA early?

If you receive a lump sum at any point during your arrangement, it can be used to pay your creditors and you can exit your IVA sooner. This can include money received from a family member, employer, or friend, a redundancy payment, proceeds from a house sale, or an insurance payout.

However, it’s important to note that any windfalls (unexpected payments) will be classed as assets in an IVA and your IP must be informed as soon as possible so they can put it towards your debt. Instead, a friend or family member can pay off your IVA as a ‘gift’ to you as long as they provide their personal details and confirm they know how the funds will be used.

The amount needed to settle your IVA early depends on where you are in your arrangement but, in any case, it should be as close to your remaining debt level as possible. The more of your debt you’re in a position to repay, the higher the chances of your creditor accepting your offer.

Conclusion

An Individual Voluntary Arrangement (IVA) can help you deal with your unaffordable debt by consolidating it into smaller monthly payments, but it isn’t without its risks.

It’s important to weigh up the pros and cons of an IVA to determine how it’s likely to affect you and, more importantly, whether it’s the right solution for you. For example, while it can freeze all interest and charges, it can also impact your credit score for six years.

Knowing what’s likely to happen if you don’t keep up payments on your IVA is also crucial. From legal action to your IVA failing, always check with a debt adviser whether an IVA is the right debt solution for you before making a final decision.