IVA Facts, the truth about the disadvantages and advantages of an IVA

An Individual Voluntary Arrangement or IVA is a legally binding agreement between you and your creditors. You agree to make monthly payments towards repaying your debt over a period of five years. If there is debt remaining then it is written off. (However, please be aware if you choose the IVA route that there are a number of situations where the amount you have to pay off could equal or exceed your total debts). In addition, your creditors will probably require you to re-mortgage your house (if you have one) towards the end of your IVA. Again please be aware that, due to the higher new monthly mortgage payment, this can be and has been a major contributory factor in the cause of people going bankrupt at the last stage or end of their IVA.

You are not guaranteed to have your proposal for your IVA accepted, for this to happen 75% (in value) of your creditors must vote for it. The reason creditors agree to an IVA is because they calculate that they will get more back from you than if you went bankrupt. And the reason why you are encouraged to take out an IVA by the debt management industry is the money in commission and charges they make from you in doing so.

The IVA can be an essential solution for the minority of people whose jobs might be affected by bankruptcy. Often Debt Management Company’s sales talk will over emphasize or generalize the effects bankruptcy will have on their client’s employment situation. However, it is worth pointing out that while it is common knowledge that bankruptcy does indeed effect certain professions such as the police and army, if you belong to certain niche sectors in the financial industry you may also be affected. Check with your HR dept. and re-read your employment contract if you belong to one of these groups.

Not all Individual Voluntary Arrangements are voluntary in the sense that some individuals, seeking to be made bankrupt, can be forced down the IVA route by the bankruptcy court. The court usually makes this decision based on the bankrupt’s high disposable income. So, despite the bankrupt being unable to service all their debts, the court judges that they should pay more off their debts via an IVA.

The IVA is often touted as the ideal asolution for those who wish to retain control over their assets (such as a house) but as already pointed out you may be asked to re-mortgage anyway. Besides, there are certain bankruptcy situations (for example families) where you can keep your house for a period of time.

The main disadvantages with an IVA are:

• You are locked into paying an IVA for five years. If you stop paying or can’t pay your IVA has deemed to fail. You return to square one IRRESPECTIVE of HOW MUCH YOU’VE PAID into your IVA. If your IVA has failed and you are made bankrupt then the fees to setup the IVA are added to your debt
• It is more expensive than bankruptcy.
• Expensive fees for the Insolvency Practitioner have to be paid both to set up the IVA and to supervise it and these get added to your debt.
• The amount allowed for living expenditures is low making for tight budgets for the next five years.
• If you have a house you’ll probably have to re-mortgage it towards the end of your IVA. On starting the IVA you’ll have to get a valuation and in the fourth year it will be revalued to determine any increase in equity. You will then have to release this equity to your creditors.
• A company motivated by fees and charges may try to con you down the IVA route when really bankruptcy is the best road for you.
• Any pay increases that you get have to be paid into the IVA.
• You have to declare any windfalls, lottery wins, inheritance, bonuses etc. And you have to use this money to pay off your original debt plus interest plus Insolvency Practitioner fees.
• Your IVA impairs your credit rating, it is recorded and remains on your credit file for six years.
• During the period of your IVA you won’t have access to credit.
• After your IVA it will be harder to obtain credit. You will probably be charged a higher interest rate on loans and, in the case of mortgages; a higher deposit will be demanded.

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The main advantages with an IVA are:

• Ongoing Interest fees and charges stop.
• All legal actions cease.
• You stop getting hassled by your creditors. All correspondence is forwarded to your Insolvency Practitioner.
• You will have (in theory) an “affordable” monthly payment.
• You may get some of your debt written off. Debt management companies often exaggerate how much you can save suggesting 80p in the pound. The maximum you are likely to save is 60p in the pound but this is rare. It is more likely to be 40p or less. One of the great, IVA Myths is that banks are happy to lose 60p in the pound of their debts that you owe them. They’ll fight to get as much money as possible from you.
• You can retain control over your home and other assets.
• You do not have to suffer the social stigma of “bankruptcy” and its attendant publicity in newspapers etc.