If you’re feeling trapped by debt that you can’t pay off, you’re not alone. While debt has a way of making us feel totally isolated, there are methods and solutions that can help you write off some or even all of your debt, such as an Individual Voluntary Arrangement (IVA).
Whether an IVA is worth it really depends on your individual situation. In this blog, we’re going to explore what exactly an IVA is, and give a balanced view of its advantages and disadvantages.
One thing is certain, it is never a good idea to ignore debt. This is because your creditors can continue adding interest and charges to a debt if you don’t respond to them. They may also pass your debt to a debt collector, and eventually take you to court.
However, if you contact your creditors and come to some sort of payment arrangement, whether that is through an IVA (where you will pay a smaller percentage of the debt), or just an agreement with them to repay the money each month, your creditors are very unlikely to spend the time and money taking you to court.
Is an IVA worth it?
An IVA is worth it if you owe £5000 – £10,000 (or more) in debt that you have no ability to pay off, if you want to legally stop your creditors from contacting you, if you want to reverse a County Court Judgement (CCJ) or bailiff action for debt, and if you want to repay a manageable amount of your debt, while getting the rest written off after the IVA is over.
However, an IVA may not be worth it if you have the funds to readily repay your debts, without worrying about your credit score being affected. An IVA may also not be right for you if you’re are in financial difficulties to the extent that you can’t pay anything to an IVA, in which case another debt solution, such as a Debt Relief Order (DRO), may be better.
Let’s dive right in, and find out whether or not an IVA is worth it for you.
What is an IVA, and how does it work?
An IVA is a legal agreement between you and your creditors (the people you owe money to) to repay a small percentage of your debt. Through an IVA, you will be able to pay off your debts at an affordable rate, after also paying for your essential needs like housing, food and utilities. As an insolvency solution, an IVA will write off the remainder of your debt after the IVA is discharged (ended). As an IVA usually lasts 5-6 years, if you make the agreed-upon repayments, when it comes to an end, all your debt will be cleared, no matter how much you still owe.
When you apply for an IVA, you’ll be assigned an Insolvency Practitioner (IP), who will negotiate with your creditors on your behalf, and manage repayments to them. Your IP will look at your budget and how much income you have after you have paid for your necessities, and decide how much you can reasonably pay. If you successfully complete your IVA, you’ll become officially debt free. After 6 years, the IVA will drop off your credit file, and you’ll have the chance to rebuild your credit score.
9 reasons why an IVA is worth it
Writes off your debt completely after five years
The best thing about an IVA, is that however much you owe, your debt will be completely cleared after 5-6 years. This can be a huge relief if you owe hundreds of thousands in debt that you can’t pay, but you don’t want to deal with bankruptcy. The IVA will not stay on your credit record forever, meaning that you can move on with your life and apply for important loans like mortgages.
Stops all creditor contact
An IVA is a legally binding contract, which means that your creditors must cease contact with you, and communicate with your IP instead. A lot of the stress of dealing with debt is the letters and phone calls from creditors and debt collectors. While a lot of these letters are auto-generated, their language can cause a lot of anxiety, and the fact that an IVA puts a stop to them is often a welcome relief (however, creditors are legally obliged to send you an annual statement of your debt every year, so you may still receive this).
You only repay what you can afford
As we established earlier, you won’t be expected to pay the full amount of your debt, and will only repay what you can afford every month. This usually has to be at least £80-£100 a month, but compared to having to pay the full amount of your debt, it’s a big improvement. You’ll also always be able to afford your essential payments, like groceries, rent, electricity and childcare, as your IP will work these out with you first, and then look at how much you have left to pay towards your IVA.
Can overturn a CCJ or bankruptcy
Even if your debt has got to the court stage and you’ve been issued with a County Court Judgement (CCJ), to pay your debt, an IVA can overturn this. Having an IVA means that you don’t have to pay the amount demanded by the CCJ, and can focus on making the small, manageable repayments to your IVA, and eventually getting your debt written off. Similarly, if a creditor is threatening to make you bankrupt or is starting the procedure of making you bankrupt, an IVA can stop this from happening.
Allows you to make one, manageable debt repayment per month
The stress of having multiple debts on credit cards and personal loans (to the point where you sometimes don’t know what you even owe), is no joke. One of the good things about an IVA is that, as well as your IP communicating with your creditors instead of you, you only have to worry about making one, condensed payment to your IVA. Your IP will then separate it out fairly among your creditors, saving you the stress of having to do it yourself.
Protects your assets
While bankruptcy might require you to sell your valuable assets including your home (if you own one) and other luxury items, an IVA can protect your assets. There’s no requirement for you to sell your home to pay off your debt (unless you decide to do this yourself), nor do you have to include any of your assets in your IVA. However, your IP may encourage you to sell off certain possessions if it can generate more cash to repay your debts faster. You will never be expected to sell any assets required for day-to-day living and working, for example, clothes, bedding and kitchen equipment, or tools you need for work.
Prevents any legal action
If you don’t pay a CCJ when you get one, the court has the legal right to send bailiffs to remove some of your belongings, or impose something called an ‘attachment of earnings’, which is an order for your employer to pay some of your wages directly to your creditor, rather than you. An IVA will give you legal protection against bailiffs and an attachment of earnings order. Your creditors are bound to the terms of the IVA, and they are not allowed to recover any money you owe them in any other way than through your IVA payments (which will be manageable for you).
Freezes charges and interest rates on your debts
An IVA can freeze any late charges and interest that has been added to your debts due to you defaulting (not paying) on them. This will reduce the total amount you have to pay, which is especially useful if you have been battling with growing interest rates.
Protects your job
With an IVA you are very likely to keep your job (you are unlikely even to need to inform your employer), even if you run a limited company. Not that it is the case that you won’t keep your job if you were to enter an alternative insolvency solution, such as bankruptcy. However, if you go bankrupt, you won’t be allowed to work as the director of a limited company or work in certain other industries.
When should you consider an IVA?
It is worth considering an IVA if:
- You owe between £5,000 and £10,000 (or more), and you are in financial distress (a state where you cannot generate enough money to pay off your debts yourself, without going into hardship).
- If you’re facing court action due to debt, and want to stop it
- If you need to overturn legal orders to send bailiffs to your home or take money from your bank account to cover your debts
- You have too many assets to qualify for a Debt Relief Order, but you want to avoid bankruptcy
- If the fees you’ll pay for your IVA won’t outweigh the money you’ll save from not having to pay off your whole debt.
When should you consider another debt solution?
It is worth considering another debt relief solution if:
- You don’t have enough money to make IVA repayments at all, even if they’re small (give us a call about your particular situation, however, and we’ll offer free advice on whether you can still get an IVA)
- You get Support for Mortgage Interest (SMI), as your payments might stop and you may have to pay back any money you’re received within the tax year.
- When you don’t have enough money to pay off any debt
- If your job is affecred by an IVA – you work in accountancy, law or financial services – check your contract to see if you can keep your job if you get an IVA
- you get support for mortgage interest (SMI) – your SMI payments might stop and you might have to pay back your SMI loan back earlier.
What rules does an IVA involve?
When you apply for an IVA, your IP will meet with your creditors and yourself, if you choose (it’s a good idea to be here so that you can help advocate for yourself, although you can join remotely rather than in person, if you prefer). If the creditors who are owed 75% of your debts all agree to the IVA, it will be legally binding for all your creditors, even those who voted against it. This means that your creditors are then bound by the rules of the IVA, and can no longer contact you, take legal action against you or in any way demand that you repay more money than is agreed in the IVA.
How much you have to pay
Your IP will work out what is reasonable for you to repay, and create a proposal for your creditors and the court. The proposal will contain your agreement to repay your creditors some percentage of the debt over the duration of the IVA. Your IP will help you propose a sum that you will repay your creditors, based on a full financial statement, which includes details of your income, assets, properties and debt. You will usually have to pay, at a minimum, 25% of your debt through the IVA, and the rest will be written off.
Terms and conditions
There are certain conditions that you have to follow in your IVA, which include:
- Annual review. You must meet yearly with your IP to go through your income and expenditure, to see if your situation has changed at all. You must provide paperwork for your IP to see what you’re earning and what you’re spending, so that they can check if you are paying the correct amount towards your IVA.
- Windfall clause. If you come into an unexpected amount of money during your IVA, for example, a relative dies and leaves you money or you win the lottery, you have to put all of it towards the repayment of your debts. This won’t reduce your future IVA repayments, either, because even though you made an agreement to only repay what you could afford, the windfall changes your level of affordability. Unless, of course, the money is enough to repay all your debts then and there.
- You can’t take out more than £500 of credit. You will need the permission of your IP to take out more than £500 in loans or credit when you’re on an IVA.
- If you miss payments, your IVA will be extended. If you don’t make your IVA repayments, the arrears (money you haven’t paid) will be added on to the term of your IVA, lengthening the amount of time you have to pay off the debt. If you can’t make your IVA payments talk to your IP straight away, as they may be able to help reduce them (although this is likely to also make your IVA longer).
- Do not hide income during an IVA. Don’t think about concealing a bank account or other source of income from your IP. This counts as fraud, and you could go to court for it.
- Report overtime payments. If you earn extra money at your job, you have to report it to your IP. If your overtime pay exceeds 10% of your normal net pay, you’ll have to pay 50% (after deducting the 10%) of the amount into your IVA.
If you have equity in your home
If you own your own home, you may have to release some of the equity in it to pay towards your IVA. Equity is the difference between the amount that your home is currently worth, and the mortgage you have left to repay on it, as well as any loans which are secured against the value of your home. Essentially, equity is the percentage of your home that you actually own. If you have an IVA and a home worth £200,000 and an outstanding mortgage of 100,000, you have £100,000 of equity in your home. An IVA demands that you release 85% of the total amount of equity and pay it towards your debt (you are allowed to keep 15% of it).
What debts can be included in an IVA?
You can include most debts in an IVA, such as:
- Credit cards
- Payday loans
- Bank Overdrafts
- Catalogue debts
- Personal loans
- Store cards
- HMRC debt
- Debts to family and friends
- Gas and electric arrears
- Council tax arrears
- Water arrears
The debts you can’t include in an IVA are:
- Mortgages and secured loans
- Child support arrears
- Court fines
- Hire purchase agreements
- TV Licence arrears
- Student loans
Can I get an IVA if I run my own business?
There is no problem having an IVA if you’re a sole trader, and run your own business. IVAs were actually initially designed with businesses and the self-employed in mind. If you are self-employed, it’s a good idea to get a self-employed IVA, as your income is more likely to vary from month to month, and self-employed IVAs are set up to either increase or reduce your monthly payments depending on how your business fluctuates. You must communicate all changes with your Insolvency Practitioner (IP) so that they know when to adjust your payments. Make sure you also cash-flow statement so that your IP can predict how much your income changes each month.
Having an IVA will not affect your ability to run a limited company, as the point of a limited company is that its finances are legally separate from the personal finances of those who run it. Just make sure that your personal and company bank accounts are at different banks, because if you include a debt to your personal account in a n IVA, this could notify company accounts and withdraw the company’s credit lines.
Now that we’ve covered all the details of whether or not an IVA is worth it, we hope you’ve found this a useful read. An IVA can be a great way to help you pay off debt in a way that is manageable, but it’s important to seek free debt advice before making any decisions.