For many people, an IVA (Individual Voluntary Agreement) is a solution that will help them get their debt under control, but it comes with certain pros and cons. It can stop you from having monthly payments that are unaffordable and give you a clear time frame for clearing your unsecured debt and gives you control of your finances back. But for others, an IVA might not be the right option. It might be too binding, or your creditors may not agree to it. Depending on your circumstances it may not be suitable, however, there are other options, such as bankruptcy, that could be considered.
While you should always seek the advice of a licensed Insolvency Practitioner, you can weigh up the pros and cons of an IVA and see whether it looks like it’s a viable solution for you.
What are the Pros and Cons of an IVA?
What are the pros of an IVA?
It’s legally binding
An IVA is completely legally binding. If your creditors agree to it, then they have to see it through, including accepting their share of your agreed payments and writing off a percentage of the debt. They can’t change the terms and they can’t take any further action against you. But remember that it’s legally binding for you too – you can’t change your mind and exit the IVA until it is complete, otherwise, it might fail, and you may be made bankrupt.
Your creditors can’t contact you
Often, when you’re in a lot of debt, the constant stream of payment chaser letters, phone calls and knocks on the door threatening legal action could be extremely detrimental to your health. A lot of people with debt concerns often ignore contact, which can ultimately make things worse. But with an IVA, your creditors are forbidden from contacting you via any means, and if they do then you can report them. So, you don’t need to avoid the mail or the phone again.
A set time frame
Rather than worrying about being in debt for an indefinite amount of time, an IVA has a clear duration that’s set out right at the start. They’re usually 5 years, although they can be extended by another year if, at the end of the IVA, you own a property that you aren’t able to release any equity from for your creditors.
You keep your home
Unlike some other debt solutions, an IVA lets you keep your home. You won’t be forced to sell it at any stage, although you will be expected to attempt to re-mortgage it, in order to release funds for your creditors, at the 6 month mark before the IVA is due to end. And if you can’t, it may be extended by another 12 months.
You also keep other assets
You may not be able to keep all of your saleable assets with an IVA, but you should be able to keep some of your important possessions like your car. If you want to keep other non-essential assets, you can ask your creditors to consider consenting to this as part of your IVA agreement.
Payments are affordable
You’ll be making monthly payments to your creditors as part of your IVA, but they’ll be much more affordable as they are based on the money you have available after your living costs are covered. Every year your budget will be reviewed to make sure your payments are still affordable for you as well.
IVAs are flexible
No-one’s circumstances will stay the same over a 5-6 year period, so an IVA takes this into account. You can’t exit the arrangement, but you can vary the terms if your personal situation changes, as long as you get the agreement of your creditors.
Reassurance
You can only set up an IVA with the help of licensed Insolvency Practitioners. These are the experts, and they’ll be there to support you in getting your agreement set up correctly so you can rest assured you’re in the best hands and you’ll get the right solution for your debt problems.
What are the Cons of an IVA?
Strict budget controls
At the start of your IVA, you’ll have your income and expenditure assessed, and you’ll be given a budget with affordable monthly payments. You’ll need to stick to this budget for the duration of your IVA, and every 12 months you’ll review your income and expenditure to make sure that payments are still both affordable and fair to your creditors so that they get the share they’re entitled to.
Another disadvantage, due to this budget, is that you may not be able to save money each month. If you like to put a little money aside for a rainy day, you’ll likely find that instead this is assigned to your debt.
It can affect your job
Because an IVA is an official form of insolvency, it can have repercussions for your job. While not as potentially damaging as bankruptcy, it’s still worth checking the terms of your employment contract before you opt for an IVA, to make sure you won’t suddenly be left without a job.
You can be rejected
Your creditors are under no obligation to accept your proposal, and certain companies may be against them or may want to disagree on the share of your monthly payment. While most major creditors are reasonable, you shouldn’t assume that by opting for an IVA that it’s all plain sailing until you’ve got confirmation. It’s also possible to fail your IVA, if you don’t keep up the monthly payment plan. In either scenario, you’ll need a backup plan, so it’s best to make sure you make each payment and speak to your Insolvency Practitioner if you start to struggle, or you may fall into further debt.
Your credit score will be impacted
An IVA will register on your credit rating for the duration of the agreement plus an extra 12 months. During this time, you won’t be able to draw any more credit above the value of £500 and even then, you may find it hard to gain that credit.
You won’t be able to get a mortgage
Because you won’t be able to take out credit until the IVA has been removed from your credit file, it’s extremely unlikely that you’ll be able to take out a mortgage. Even if you apply for a joint mortgage with a partner who has no credit issues, your own situation is likely to mean you’ll be rejected.
It’s a long-term commitment
Unlike bankruptcy, which can be completely overcome within 3 years, an IVA will tie you down to making repayments for 5 to 6 years. It’s not a short-term solution but should instead be seen as a long-term fix.
You may need to re-mortgage your home
If you have a pre-existing mortgage, you’ll likely be asked to re-mortgage your property as your IVA draws to a close, in order to give each company as much of their money back as possible. If you can’t re-mortgage, then your IVA may be extended instead by another year.
New debts won’t be included
If you do take out any new debts during the course of your IVA, these won’t be paid off as part of the agreement. So, you’ll still be liable to clear these once the IVA has run its course.
Is an IVA worth it?
Whether an IVA is worth it or not depends on your personal situation, and it won’t be right for everyone. There are pros and cons associated with it. There are a number of ways it can help you, just as they are numerous disadvantages as well.