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Living on a debt solution

Can I lose my savings or bank account if I enter into an IVA or become bankrupt?

Posted 06 January 2016 by Christine Walsh

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Are you thinking of entering into an IVA or bankruptcy? It’s best to look at all the details, read our guide on how these debt solutions could affect your savings and bank accounts.

If you’re thinking that you might need to enter into an Individual Voluntary Arrangement (IVA), or to go through bankruptcy to tackle your problem debts then it’s important to do your research first. First of all, there are many reasons why entering into one of these solutions could benefit you. They both involve giving you the chance to pay something towards your debt, but only what is realistically affordable. Also, with both these solutions, you would know when you’re going to become debt free as, if you stick to the terms of the agreement, your unsecured debt would be written off when it ends. 

On the other hand, entering into one of these solutions may require you to make some changes in how you manage your money. In this blog we’re going to look at the possible effects that these solutions may have on any savings or accounts you have, so that you can get a balanced idea of both the advantages and disadvantages of these solutions. Exactly what happens depends on your situation and the debt solution that you take. Let’s have a look at the basics, to give you an idea of when you would be expected to put existing funds into an IVA or into the bankruptcy. 

Savings on an IVA

If you are considering entering into an IVA then it’s unlikely that you’ll have a large amount in savings. If you do then you could simply pay the debt, or a substantial amount of it, with those savings. However, it’s entirely possible that you could find yourself in a position where you have a little bit in savings – but not enough to pay the debt off in full or provide a reasonable settlement amount either. 

In case you’re not familiar with this solution an IVA means your creditors agree to you paying an affordable amount towards your unsecured debts each month. You would do this for a certain amount of time, normally five to six years, and if everything goes to plan the rest of the debts included in your IVA would be written off. What would happen with your savings would depend on what you and the Insolvency Practitioner dealing with your IVA place into your proposal (the document outlining how your particular IVA will work.) You could ask your creditors if you could keep some of your savings aside for emergencies however, it is likely that your creditors would ask for savings to be paid into your IVA. This is because your creditors would like you to be trying to pay back as much of what you owe as you can. 

Savings and bankruptcy

If you have a significant amount in savings, it’s best to see whether you can use the money to avoid going bankrupt at all. There are some instances, prior to going bankrupt, where creditors will accept a lower amount than everything you owe if it’s large enough and given as a lump sum, this is known as a settlement figure. 

If this isn’t possible, and you know that you can’t pay your debts back in a reasonable amount of time, any savings you have would go to your creditors if you were to go bankrupt. 

Bank accounts on an IVA

Entering into an IVA will mean dealing with some changes to your lifestyle, but as long as you’re prepared there’s no reason why those changes should be too difficult for you. 

An example of this is possibly having to close your current account. Most people have a current account which comes with an overdraft facility, which is credit. On an IVA you’re not permitted to use any credit without the consent of your Supervisor, so you may not be able to keep this service.

Banks have been known to freeze current accounts when they learn that customers have entered into an IVA. So does this mean you’re going to be left without an account on an IVA? Absolutely not. Banks and alternative account providers offer basic bank accounts which are usually available to people who are insolvent. We’ll go into these in more detail later on, but first let’s look at what might happen to your account if you went bankrupt. 

Bank accounts and bankruptcy 

If you go ahead with bankruptcy the Trustee would need to look at all aspects of your financial situation and this includes contacting your bank. Your bank is very likely to freeze the account when this happens, so it’s a good idea to set up a basic bank account before this happens. Any money in the account when it’s frozen may be put into the bankruptcy. 

Basic bank accounts

If you enter into an IVA or choose to go bankrupt to help you tackle your problem debts then a basic bank account might be the answer. You wouldn’t get an overdraft with these types of accounts, which is a good thing as you’re not usually permitted to use any credit whilst you’re bankrupt or on an IVA without permission from your Trustee or Supervisor. 

It used to be that you would still be charged for a failed transaction even if you just had a basic bank account. That means if you arranged for a direct debt to go out, but there wasn’t enough money to cover this, then your bank would apply charges - but this has changed. From 1st of January 2016 nine high-street banks will offer completely fee-free basic accounts to those that don’t qualify for any other type of account. This is good news and could be helpful for people going through bankruptcy or entering into an IVA. 

Bankruptcy and IVAs can be good ways to tackle problem debt in the right circumstances, but they are a big step and it would be unrealistic to think that they wouldn’t have any effect on your current way of life. However, if you’ve sought professional advice, understood the details and know that you won’t be able to pay your debts off in a reasonable amount of time, one of these solutions could be right for you. Remember, we are only a phone call away. Our debt experts can answer any questions you have about bankruptcy and IVAs and are experienced in assessing your situation and recommending which one would be best for you. There’s also lots of information at The Money Advice Service on this and money matters in general. 

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.