What are the pros and cons of an IVA?
An IVA, like any debt solution, has both pros and cons. If you’re thinking about entering into an IVA, it’s really important that you look at both the advantages and disadvantages it offers so that you’re prepared for how it might affect your life.
While you’re reading about this solution, you should bear in mind that our experienced debt advisors would never recommend it unless the benefits to you outweighed the downsides. So the most important thing to do is seek professional advice, so you can be sure that it’s the right thing for you to do.
Let’s have a look at the advantages first.
The main advantage to this debt solution is that it cuts the monthly payments on your unsecured debts, bringing them down to a level that is affordable and sustainable for you.
IVAs are designed for people who are still able to pay something towards their debts, but realistically could never pay back all of what they owe. This means you will pay something towards your debt every month and, when the IVA is over, as long as you’ve kept to the terms, anything leftover will be written off entirely. IVAs are also useful for people who want protection from their creditors trying to make them bankrupt.
Write off what’s left
As long as you complete the IVA successfully, the interest and charges on your debts will be written off, along with the remainder of your unsecured debts, so your debt would not continue to grow as it would if you were paying it off over the life of the IVA.
An end to contact from creditors
Another huge advantage for most people worried sick about debt is that entering into an IVA will mean your IP will deal with all further contact from your creditors. This could come as a great relief to you, as creditor contact can be stressful, especially if you have a number of creditors asking you for money at the same time.
Keep your home
IVAs can have advantages for homeowners too. If you’re a homeowner, you’ll never be asked to sell your house, unlike with bankruptcy. Moreover, because the payments you make into an IVA will take into account your essential costs, including any priority debts you have, you can be confident that you'll be able to afford your mortgage payments. Six months before the end of your IVA, you may be expected to try to remortgage so that you can release equity and put it into the IVA. If you’re not able to – which is quite common - your IVA will simply be extended for up to another 12 months.
Get an end date
As an IVA goes on for a set amount of time, usually five or six years, you will have a definite end date for your debt – and this can be a comforting thought. Once your IVA is completed, any debt that remains will be written off, giving you a financial fresh start.
Reduce your spending
In order for the IVA to go ahead, your creditors need to agree to the proposal that your IP puts together for you. This means that, in some cases, you may have to make changes to your lifestyle to make sure that the proposal is as fair to you and your creditors as possible. As part of this, you will need to stick to a budget for the five or six years that the IVA lasts for, which may mean that you need to reduce your spending on non-essential items. This is very important as it shows your creditors that you’re paying as much as possible towards what you owe.
Secured debts not included
An IVA will only help you with unsecured debts, like credit cards, store cards, overdrafts and loans that are not secured against your home. Any secured debts, such as your mortgage, can’t be included. You’ll have to make sure that you keep paying these yourself. Having said that, because you’re making lower payments on your unsecured debts, you should find it easier to keep up with your other payments, like your mortgage. This is because the amount you pay into your IVA is based on what you have left over after you’ve paid for all your essential living costs.
Your details on the Insolvency Register
As we said, details of your IVA go on the Insolvency Register, which is a record of all the current insolvencies in the country. The register is public and can be accessed by anyone who wishes to search it.
Your job may be affected
Depending on your job, there is the possibility that starting an IVA could affect your work or stop you from going into certain professions. Accountants, solicitors, police officers, prison officers, judges, company directors and bank managers are some of the professionals that may find IVAs are incompatible with their jobs. In some cases an IVA may not legally restrict you from doing a certain job, but an employer can state in their employment contract that they wouldn’t want you to continue in the position if you became insolvent.
Tell your IP or debt advisor if you have a job that specifically stops you from entering into an IVA. Your advisor will simply look at what other debt solutions could be more suitable for you as a result. Your advisor would never jeopardise your income by recommending a debt solution that could potentially affect your employment.
You would also need to think about whether you want to go into any of the professions listed above in the future, as starting an IVA now could stop that from happening.
Impact on your credit history
An IVA will also have a negative effect on your credit rating overall. We’ll look at this aspect of the IVA in more detail in the next section.
Once you agree to an IVA, you won’t be allowed to take out any credit without getting the permission of your IP and telling the creditor about your IVA. The lender you apply to may turn down your application because of your IVA.
Restrictions when on an IVA
An IVA gives you the chance to reduce your monthly payments, and have the remainder of any unsecured debts included on the IVA written off when it successfully completes. Because of this, there are some restrictions and terms that you need to be aware of while the IVA is ongoing. These are put in place to ensure fairness to all involved and to protect your IVA from failing. They include:
- sticking to a budget that allows you to pay as much as possible into the IVA,
- understanding that if at any time you earn more than 10% over your normal earnings stated in the IVA, half of the extra amount must be paid into the IVA,
- understanding that any windfall over £500 must be paid into the IVA in full (up to the limit of your debts plus interest), and
- for homeowners, recognising that a restriction will be registered with the Land Registry meaning your IP will be informed if you try to sell or give your property away.