First of all, it’s important for you to know that you can discover more about how to manage your debt and to receive free debt advice by visiting www.moneyhelper.org.uk, or you can read about options for paying off your debt.
If you find yourself overwhelmed by debt, an Individual Voluntary Arrangement (IVA) might seem like a beacon of hope. However, it’s important to recognise that an IVA isn’t a cure-all. While it helps manage awkward debt by breaking it down into manageable payments, it also comes with certain conditions and limitations that can affect your lifestyle.
To determine if an IVA is the right choice for you, it’s crucial to weigh all the pros and cons. This guide will help you understand the key advantages and disadvantages of IVAs, ensuring you make an informed decision.
Advantages of Individual Voluntary Arrangements
Partial Debt Forgiveness
While an IVA won’t erase all your debt like bankruptcy might, it can write off a portion if you keep to the agreement. Typically, an IVA lasts five or six years, and any remaining debt at the end of this term is usually written off. This benefits both you and your creditors, as they recover more money than they would through bankruptcy, and you have a clear incentive to stick to the repayment plan.
Protection from Creditors
One of the most stressful parts of debt is constant harassment from creditors. An IVA legally obliges your creditors to cease all legal actions against you, eventually providing relief from incessant phone calls.
Asset Protection
Unlike bankruptcy, an IVA doesn’t require you to sell your home or car to pay off your debts. However, you might need to remortgage your property or sell a high-value car to release some equity for your creditors.
Frozen Interest Rates
Once you enter an IVA, your creditors generally freeze interest and additional charges on your debts. This means your monthly payments will go toward reducing the principal debt, rather than paying off fees.
Ongoing Support
Opting for a reputable IVA service provider ensures you receive continuous advice and support throughout the agreement period, helping you navigate any concerns that arise.
Disadvantages of Individual Voluntary Arrangements
Impact on Credit Score
Entering into an IVA will significantly affect your credit score, and this information remains on your credit report for six years. This can make obtaining credit more challenging, and any new credit over £500 will require approval from your Insolvency Practitioner.
Limited to Unsecured Debts
IVAs are only applicable to unsecured debts, like credit card debt. Secured debts, such as mortgages and car loans, cannot be included and must be managed separately. You might also need to release equity from your property to pay off these debts.
Strict Budgeting
IVAs are legally binding, requiring you to adhere to a strict budget. This can lead to a significant lifestyle change, and failing to meet the terms could result in bankruptcy.
Public Record
An IVA is recorded on the public Individual Insolvency Register, which can be accessed by anyone, including family, friends, future creditors, and employers. This could impact your personal and professional reputation.
Creditor Agreement Required
An IVA requires the approval of 75% of your creditors. If they don’t agree, you cannot proceed with the arrangement.
Windfalls Affect Repayment
Any significant windfalls, such as an inheritance or lottery winnings, must be used to pay off your IVA early or increase your repayments. While this helps clear your debt, it may not align with your plans for such funds.
Higher Interest Rates for Remortgages
If you enter into an IVA solution, you may find that remortgaging or releasing equity attracts higher interest rates.
Unsure About the Best Debt Solution for You?
If you’re still uncertain about which debt solution is best after considering the pros and cons of an IVA, don’t hesitate to reach out. Our specialists are here to understand your financial situation and offer guidance on regaining control of your debt. Connect with one of our experts for personalised advice.