Debt is necessary for people to carry out most financial actions. You need debt to purchase a home with a mortgage, acquire a business loan, and increase your credit card limit. However, debt is overwhelming for some, especially during an economic downturn.
At the end of April 2021, the English population demonstrated financial distress, through increased debt and unemployment. English people owed £1,714.4 billion in debt. Total outstanding credit card debt amounted to £53.7 billion, and average total debt per household was £61,509.
With so much debt, some people won’t make all of their monthly payments. Failing to pay back debt leads to decreased credit ratings, decreased access to loan products, and in some cases, bankruptcy.
Luckily, there are some debt solutions for people who need help with debt – including debt consolidation and individual voluntary agreements.
Are you insolvent and in need of professional help?
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a formal debt solution for people struggling to repay their debts. An IVA is a legally binding contract between a borrower and their creditors that describes the terms and period of time in which the borrower can repay their debt. Your repayment might look like a lump sum payment, regular monthly installments, or both.
An IVA contract is established by an insolvency practitioner (IP), usually a lawyer or accountant. An IP’s services are usually expensive, and increases depending on how high the debt is. Your IP puts together an IVA proposal for you, and your creditors will review and negotiate the proposal with you IP during a meeting of creditors. Throughout the course of an IVA, the IP communicates with your creditors and pays them (after you pay your IP) on your behalf.
An IVA is a debt solution offered in most of the UK, specifically in England, Wales and Northern Ireland. Scotland offers a slightly different solution known as a protected trust deed.
How Does an IVA Affect Your Life?
An IVA has consequences on your credit and sometimes your job.
IVAs result in negative marks on your credit report for about 6 years. This hurts your ability to take out other loans, increase your credit card limits, or obtain a mortgage, as lenders won’t be as willing to lend to you.
Specifically, during the course of an IVA, you need written permission from your IP to borrow more than £500. This written permission isn’t required for essential expenses, like utilities and gas.
IVAs affect some aspects of your financial life, but not permanently. With some careful planning and discipline, you can improve your credit and get your affairs back to normal over time. Additionally, you won’t need to ask permission from your IP to borrow money once the IVA is complete.
When you have an IVA, you might not be able to continue working if you are employed as one of the following:
- Property Conveyor
- Financial Advisor
This isn’t true for everyone, however. To learn about how an IVA affects your job:
- Review your employment contract
- Consult with your HR department
- Consult with your trade union or professional body
Do IVAs check your bank account?
Yes, IVAs check your bank account to verify your income and expenditures. You usually need to provide your IP with bank statements as well. It’s not uncommon for an IP to check your bank account frequently, so it’s important that you declare all assets and income once you enter into an IVA.
Benefits of an IVA
An IVA works better for some people than other debt relief options for a few reasons:
- IVAs are legally binding, so creditors cannot take action against a borrower throughout the course of the arrangement.
- The creditor discharges all of your debt, even remaining debt, after the IVA is complete.
- Time-limited payments make IVAs convenient for people who work with a budget.
- IVAs are removed from the Individual Insolvency Register in England three months upon completion of the arrangement.
Disadvantages of IVA
There are also some disadvantages you should consider before undergoing an IVA process:
- The Individual Voluntary Arrangement process is costly, as IP fees are high.
- IVA contracts depend on personal circumstances – for example, if you experience job loss and can’t make your repayments, the IVA could fail.
- IVAs sometimes require personal pension to go towards payments.
Can an IVA take my tax refund?
Some IVAs have a windfall clause, which means that any large amount of money you receive, such as a work bonus or inheritance, could be paid into the IVA. Make sure you tell your IP about any tax refunds you receive.
Can I get a loan to pay off IVA fees?
Most people who enter into IVAs are at least £15,000 in debt with 3 creditors or more. That debt alone might make it hard for someone to take out another loan to cover IVA fees.
However, it’s difficult to pay off an IVA with a loan because you cannot borrow more than £500 without your IP’s permission, including:
- Personal loans
- Payday loans
- Credit cards
- Loans from family or friends
Despite permission from your IP, you might experience difficulty borrowing from another creditor since your current IVA shows up on your credit file.
If you need debt advice and are considering entering into an Individual Voluntary Arrangement, it’s important to research all debt solutions available to you before making a decision. Our advisors are skilled in debt management and can help you assess the options available to you. Speak to a credit counsellor today.