Just like with most things in life, an IVA has its advantages and disadvantages.
Being aware of them will definitely help you better understand your situation so you can make an informed decision about whether you should apply for one yourself or not.
Today, I’ll be discussing the pros and cons of an IVA and how you can assess them to determine whether an IVA would be right for your circumstances or not.
- Being in an IVA ensures that your interest and charges that are additional on your debt(s) are frozen. As soon as your IVA is approved, all interests and charges on your debt are frozen so you don’t have to worry about the amount you owe increasing. This is especially important since an IVA lasts a very long time (typically 5 years). If your interest had kept increasing over the course of these 5 years, then you would have ended up paying much more money in the form of interest.
- An IVA is relatively affordable compared to other options you may be considering. The great thing about an IVA is that you have an insolvency practitioner working closely with you who will ensure you’re being dealt with fairly. You don’t have to worry about being pressured into paying more than you can afford as your insolvency practitioner will ensure this doesn’t happen. You will only be obligated to make monthly payments that you can afford.
- You will be legally protected. An Individual Voluntary Arrangement is a legally binding agreement that not only you but your creditors also have to abide by. Once your IVA is approved, all of your creditors will be bound by the terms put forth in your IVA proposal. This means that they will not be allowed to contact you for any payments outside of your agreed-upon monthly payments. Other than that, this also means that your creditors will be prevented from taking any legal action against you such as petitioning for your bankruptcy. You will not even have to deal with your creditors directly anymore as your IP will do this for you.
- An IVA protects your assets. Your home and a vehicle that you may need to run your business or commute to work will be protected and you will not be asked to sell them. However, it must be noted that homeowners may be asked to release equity from their homes towards the end of their IVAs.
An IVA may seem like an attractive option to you up until this point but I must warn you that there certainly are some IVA disadvantages as well. I’ve listed them below:
- An IVA will severely impact your credit rating. The IVA will stay present in your credit file and keep negatively affecting your credit rating for six years after the commencement of it. Furthermore, your name will be added into the Individual Insolvency Register which is a public database that shows you’ve taken out an IVA. This will be publicly available to lenders. Your name in the Individual Insolvency Register coupled with your low credit rating will mean that you will have a lot of difficulty securing any type of credit while your IVA is in place. Always be sure to keep in mind the fact that not only will an IVA affect you and your financial dealings when it is in place but it will also affect you for a while after it has ended.
- There are certain debts you cannot include in an IVA. These debts include student loans, child support, court fines and social fund loans. Always be sure to check what debts are covered by an IVA and whether the debts you have qualify or not. Your IP can help you with this.
- As mentioned earlier, homeowners may be asked to release equity from their homes towards the end of their IVAs.
- It may be quite difficult for you to get your creditors to agree to the terms of your IVA proposal. Please note that your creditors are under no obligation to accept your proposal. If your creditors refuse your initial proposal, you may have to concede to changes that they may suggest or they may even not be open to the idea of you undergoing an IVA at all.
- IVAs have a windfall clause. A windfall is a large sum of money that you may unexpectedly come upon during the course of your IVA. Examples of windfalls include money won through a lottery, money inherited from a deceased relative, etc. If you’re in an IVA, you will be expected to hand 100% of your windfall sum to your creditors. Not only that but this will also not have any effect on your monthly IVA payments. You will still keep making the monthly payments according to the rate which you can afford.
Do the Benefits of an IVA outweigh the Disadvantages of an IVA?
There’s no one way to answer this question since it depends entirely on your financial circumstances and the type(s) of debt you have. Just looking at IVA pros and cons will not help you reach an answer as it’s a little more complicated than that.
For example, if you have a lot of valuable assets that you don’t want to lose because of your debt, then an Individual Voluntary Arrangement would be a great option for you. However, if you don’t have any valuable assets in the first place, then this advantage of an IVA would be useless for you.
If you want to become debt-free as soon as possible then maybe you could look to some other debt solutions such as bankruptcy. Bankruptcy can make you debt-free typically within 3 years. However, your assets are not protected in bankruptcy.
Of course, everyone wants to become debt-free as soon as possible but if you have assets that you want to protect, then an IVA would definitely be the best choice for you. Of course, you would not be able to qualify for a Debt Relief Order if you have assets that you want to protect.
It’s important to note that your monthly payment in an IVA will always be affordable to you as your IP will work with you to ensure you’re only paying what you can afford. This is definitely an extremely major benefit that you should think about.
Most people are turned off by the long duration of an IVA. It typically lasts 5 years but can sometimes even go to 6 years or more depending on the circumstances. It could extend to 6 years or more if you fail to make a monthly payment or monthly payments during the initial duration of your IVA.
It’s important to note that while it definitely is a long duration, it’s an affordable debt solution that protects your assets. That is something that most other debt solutions don’t provide.
Furthermore, it also keeps your creditors in check as it’s legally binding for them as well. They will not be allowed to pressure you in any way while your IVA is in place. This is especially helpful for borrowers who are being hounded by their creditors due to their debt.
When an IVA is in place, you will not be dealing directly with your creditor at all. This means that even if it lasts 5 or 6 years, you won’t have to talk or deal with them directly.
In addition to this, as I mentioned earlier, since your creditors will not be able to take any further legal action against you or seize your assets, this will definitely relieve you of a lot of stress which you will probably still have if you opt for some other debt solution.
Lastly, let’s talk about the toll an IVA will have on your credit score. While it’s definitely scary to think about, the truth is that you should really not be seeking credit at all during the course of your IVA anyway.
You’re not going to need a loan anyway since your monthly payments towards your IVA are going to be affordable thanks to your IP.
The only case in which you would need a loan is in an emergency. In that case, you can definitely talk about it with your IP and sort something out.
If you have reasonable cause to take out a loan, then your IP will allow you to do so and they may even vouch for you which could help you secure a loan from a lender.
The mention of an IVA stays in your credit file for 6 years. So, if your IVA ends in 5 years, it stays in there for an additional 12 months. I highly recommend that during these 12 months, you should be working on improving your credit score and not taking out loans.
You can do this by using a credit card to pay for your monthly essential expenses and paying the outstanding balance in full each month.
If you’re confused about whether an IVA could be right for you then it would be a good idea to seek debt advice from a professional. You can contact an independent charity such as StepChange or Payplan for debt advice.
In the end, I just have to say that there are certain pros of an IVA which may not be useful at all to you depending on your financial circumstances. Similarly, there are certain cons of an IVA that you can work around as well so that they won’t matter.
It’s important for you to assess your financial situation thoroughly to determine what benefits will actually be beneficial to you and which cons will actually matter to you and the type of debt you have.