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IVA guidance and advice for people in debt

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IVA guidance and advice for people in debt

Reviewed: 14th July 2017

What does an IVA stand for?

IVA stands for an Individual Voluntary Arrangement, a formal method of dealing with unmanageable unsecured debt in England, Wales and Northern Ireland. It is one of several formal debt solutions aimed at helping people out of serious financial problems.

What is an IVA?

An IVA is a formal and legally-binding agreement with creditors to repay debt over an extended period of time. It allows debtors a breathing space in which to regain control over their finances, and as such, is an effective insolvency solution for eligible individuals.

By law, an insolvency practitioner (IP) must administer the process. This involves negotiating with creditors, making a formal proposal for repayment, and distributing monies between the creditors as arranged.

An IVA offers you a potential alternative to bankruptcy if you are in serious debt, but you also have a regular income with which to make the required monthly repayments. The arrangement can include unsecured debt, such as payday loans, credit card arrears, overdrafts, personal loans, and catalogue debts.

The fees for an IVA should be factored into the monthly repayment, and are deducted by the IP administering the process.

Bankruptcy vs IVA

Declaring personal bankruptcy is a drastic step, and one which affects every area of your life long after you are discharged. Financial freedom and control are removed, which although making you ultimately debt-free, also leaves behind a long-lasting and poor financial reputation.

Although an IVA is also a formal debt process, it is less extreme than bankruptcy. Anyone entering an IVA will experience problems obtaining credit for some years, but an IVA carries with it less social stigma, and offers protection if you own property.

So when is an IVA likely to be chosen over bankruptcy?

  • There is disposable income available at the end of each month
  • Your job may be affected if bankruptcy is declared
  • You are self-employed and/or own your home

Bankruptcy may be more appropriate if you are not a homeowner, and do not have a regular or significant amount of disposable income. The bankruptcy process is not as flexible as an IVA, but has a shorter duration and may involve paying less money back to creditors.

What is the IVA register?

The IVA register is a public record of anyone who has entered into such an agreement, and is run by the Insolvency Service. As well as listing all current Individual Voluntary Arrangements in England and Wales, it contains details of debt relief orders, bankruptcy orders, and fast-track voluntary arrangements.

The fact that the register is open to the public can be an issue if your job is at risk because of your financial situation. Employers in some sectors, such as financial and legal, do not allow their employees to continue if a formal insolvency process is entered into.

The register can be viewed online, and also at local Official Receiver offices around the country. As well as containing details of the IVA, other information is viewable, including your name, address, date of birth, and occupation. The register entry will be removed three months after the IVA has ended.

Do I need an IVA? Take the Test

With several formal debt relief procedures available, it is important to find out whether an IVA is going to be the best option for you. A number of factors are taken into account when an IP decides whether or not an IVA would be suitable, and they may ask the following questions:

  • Are you unable to repay your debts in a reasonable timeframe?
  • Do you receive a regular wage?
  • Is there an adequate level of disposable income available with which to repay creditors?
  • Do you have access to a lump sum of cash, either now or in the future?

Pros and Cons of an IVA

Pros-
  • Any debts remaining at the end of the IVA term are written off
  • All charges and interest on the debt cease
  • It is an alternative to bankruptcy
  • Your home and other assets may be protected
  • An IVA offers flexibility, so if your circumstances change for the worse your IP may be able to amend the monthly repayment amounts, or negotiate with creditors for a payment ‘holiday’
  • It is a legally-binding agreement, so creditors cannot pursue you for the debt as long as you continue to meet the IVA’s terms and conditions
  • You can be free of debt in 5-7 years
  • You make a single monthly repayment which is distributed amongst your creditors
Cons-
  • An IVA can be expensive
  • It can affect your job
  • If you do not keep up the repayments, you could be forced into bankruptcy by one or more of your creditors
  • You may need to release equity from your home in the fourth year of the IVA
  • If you are not a homeowner, the IVA may run for several more years in order to maximise returns for creditors
  • An IVA will be marked on your credit file for six years, and could affect your ability to borrow for many years after
  • Secured debts are not included

How long does an IVA last?

An Individual Voluntary Arrangement generally lasts between five and seven years. The exact duration depends on whether you are a homeowner, as if you own property you may have to release equity at some point.

This release of equity provides a lump sum payment to creditors, in addition to the regular monthly amounts paid throughout the term. If you are not a homeowner, it does not discount you from entering into an Individual Voluntary Arrangement, however.

Instead, the insolvency practitioner may decide to negotiate with creditors for payment over an extended period of time – usually until the end of year seven.

Can I get credit with an IVA?

When you enter a formal debt solution of any kind, the credit reference agencies are informed and a note of the arrangement is made on your credit file. An IVA will remain on your file for a period of six years, after which time it should be removed.

Because lenders carry out due diligence measures prior to agreeing any loan or credit, your credit report will reveal that you have entered into an IVA. This alerts the lender to the fact that you represent a risk of non-payment to them, and they will refuse to grant any borrowing.

Even when the IVA record has been removed from your credit report, it is likely that you will continue to experience problems in obtaining credit for some years. Financial institutions are always going to protect their own interests in this way, but it is worth knowing that some lenders specialise in lending to people who have been in debt.

This means that you may be able to take out what is known as a ‘credit builder’ credit card, or obtain a ‘bad credit’ loan.

Getting a mortgage after an IVA

You will not be able to obtain a mortgage whilst a record of the IVA remains on your credit file, and will continue to struggle to obtain a ‘standard’ mortgage for years after. There are certain lenders, however, that offer mortgages to those with a bad credit rating.

These are often known as ‘adverse lenders’ and you will find the mortgage interest rate is significantly higher. Again, this is because lenders need to protect themselves from risk of non-payment, but the rate you are offered also depends on how long it is since the IVA ended.

The longer you are prepared to wait before applying for a mortgage, the better the interest rate and other terms and conditions may be. Products will also vary between lenders, so it is a good idea to use a mortgage broker when searching initially.

Applying for an IVA

When considering an IVA, you need to obtain impartial professional advice from licensed insolvency practitioners. Real Business Rescue has a dedicated personal insolvency team who can establish your suitability for an IVA, and advise on how it will impact your life in the future.

We will look at your overall financial position, formulate a proposal to creditors to repay a proportion of your debts over the IVA term, with any remaining amounts being written off.

Creditors vote on whether to accept the IVA, and if they do, all interest and charges on the debt cease.

IVA fees are agreed with you prior to signing, and taken from the negotiated monthly repayment. If you require any further information about Individual Voluntary Arrangements, such as whether or not you are eligible, one of our licensed insolvency practitioners at Real Business Rescue can help. 

We offer a free same-day meeting in complete confidence, and can provide the advice you need when facing severe debt. With 55 offices stretching from Inverness down to Exeter, Real Business Rescue can offer unparalleled director advice across the UK.

 


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