Dealing with multiple debts is no cinch – especially if it’s unmanaged or bad debt. If you’re struggling financially, finding a suitable repayment arrangement can be difficult. While there are plenty of ways to defuse debt, it is important to work out a plan that suits your ongoing financial situation.
Your income, savings, assets, and debt are factors that will dictate which plan suits you the most. If you’re on the brink of defaulting on your debts, you could consider an Individual Voluntary Arrangement or IVA. An IVA will allow you to pay off your debts the way you want to – either through monthly instalments or a lump sum.
Read on to learn more about how IVAs work and their impact on your financial standing.
What is an IVA?
If you’re struggling to manage your outstanding debt, an IVA could help you out. An IVA or Individual Voluntary Arrangement is a legal agreement between you and your lender, which defines a mutually agreed repayment schedule.
Most people use a part of their income each month to pay the creditors, while some pay off the entire loan in a lump sum. In exchange, lenders usually agree to waive off a portion of your debt so that you won’t repay the entire outstanding balance.
An IVA is a legal procedure approved by the court, so you and your lender are bound to adhere to the terms of the arrangement. While IVAs can be customised to give you more flexibility, they are expensive and have numerous associated risks. It is best to understand how IVAs work before opting for one.
How does an IVA work?
Choosing a suitable debt repayment plan that aligns with your financial circumstances can be challenging. If you happen to get into an IVA to pay off your debts, you will typically need to arrange a repayment plan with an insolvency practitioner.
Ideally, it would be best if you planned the repayment arrangement around your affordability and income. Depending on your income, you can either decide to pay a lump sum or monthly instalments, and the creditors will agree to it. At least 75% of the creditors need to agree with the terms of the arrangement for it to go through.
With monthly payments, your IVA would normally last for about 5 to 6 years. And, your repayments will go directly to the insolvency practitioner, who will act as an intermediary and distribute the money to your lenders. The insolvency practitioner will keep a portion of this money as the fee for their work.
If your repayments aren’t sufficient to settle your entire debt by the end of the term, you will be exempted from paying the rest. Although, you should discuss this with the insolvency practitioner before getting into an IVA.
Who will my IVA affect?
Since an IVA defines a repayment arrangement between a creditor and borrower, your creditors will be able to see that you’ve entered the agreement. Your IVA will be equally relevant to your council, network provider, or utility suppliers as it will be to banks. In case you’re self-employed, the HMRC and trade creditors will be notified about it.
Details about your arrangement will be recorded in the Individual Insolvency Register, which can be viewed on the online portal. However, you won’t have to worry about your friends or neighbours knowing about it since the portal is only accessed by creditors or people working in the insolvency business.
When to consider an IVA?
An Indiidual Voluntary Arrangement may give you greater flexibility concerning repayments, but several risks are associated with this arrangement. You might benefit from an IVA if:
- Your cumulative debt exceeds £10,000 (You can get an IVA with a smaller debt too, but it may not be worth it considering the expensive fee).
- You owe money to multiple creditors (at least 2).
- You prefer not to deal with your creditors personally.
- You have sufficient savings or income to repay your debts through monthly repayments.
You can always speak to a representative from your nearest Citizens Advice or check directly with an insolvency practitioner to learn more about the subject. To find a licensed practitioner, check the GOV.UK website.
Will the IVA impact my credit score?
If you go through with the arrangement, it will get recorded on your credit report and, consequently, hamper your credit score for a while. While you’re on IVA, you will not be able to borrow anything more than £500 unless your practitioner approves it, or the credit is for utilities like water, electricity and gas.
Apart from your credit score, there are various aspects of your life that an IVA could affect:
- Expenditure: You’ll have to adhere to a strict budget while you’re in the arrangement, with any additional income or bonuses going towards the debt payoff.
- Credit: You may not be able to borrow anything over £500 unless it’s for basic utilities like gas, electricity, or water. For an amount exceeding £500, you have to seek approval from the insolvency practitioner.
- Assets: If your income and savings don’t suffice, you might have to sell your valuable possessions to settle the debts. Your car may be an exception to the rule if you need it for work. Although, if it’s an expensive one, you might have to make do with a cheaper version and contribute the balance towards the debt pay off.
- Savings: Normally, all your savings would go towards settling your debts. If you happen to inherit or come into a considerable amount of money during your term, you might have to pay the entire amount you owed before signing up for the arrangement.
- Business and employment: Companies or traders may check details about your IVA in the Insolvency Register. So, if you’re self-employed or seeking employment, it may affect your credibility and reputation.
Will the IVA fade from my credit file?
IVAs typically stay on your credit report for six years from the date on which it officially started. Usually, the insolvency practitioner assigned to you will send a completion certificate to the insolvency service. They will then notify other credit agencies about the status of your Individual Voluntary Arrangment. Plus, your Individual Voluntary Arrangement will be removed from the Insolvency Register three months after its completion.
Consider this before getting an Individual Voluntary Arrangement
- An Individual Voluntary Arrangement is a legally binding agreement wherein creditors cannot take further action on you while repayments are being made.
- They are time-bound, so it is best for people who can adhere to a budget.
- All debts remaining after the end of your Individual Voluntary Arrangement will be wiped off.
- They are removed from the insolvency register three months after completion.
- A qualified, licensed insolvency practitioner could charge a hefty fee.
- If your circumstances change and you fail to keep up with the repayments, the Individual Voluntary Arrangement would fail, leading to bankruptcy.
- They could eat into your pension, which would be considered as income.
- If you’re an accountant or solicitor on an Individual Voluntary Arrangement, the agreement may hold you back from continuing work.
An Individual Voluntary Arragement, if used responsibly, can be a smart way to deal with debt. However, you must understand that this arrangement may not suit everyone, so acquaint yourself with the pros and cons and make an informed financial decision.