What are the Negatives of an IVA? 2022 Guide
What are the negatives of an IVA you should know about when considering this debt solution? An IVA might be the most suitable way for you to get out of debt, but like all debt solutions, it comes with positives and negatives. We take a look at these in this easy-to-read guide.
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement (IVA) is a legally binding debt solution between you and your creditors. It can be used by people who are struggling to make repayments on their debts in England, Wales and Northern Ireland. To organise an IVA with your creditors, you must use the services of an insolvency practitioner (IP).
How does an IVA work?
An IVA works by committing you to make a single monthly payment for five or six years. This payment will be based on what you can afford to pay and proportionally split between your creditors. At the end of the five- or six-year period, any unsecured debts that have not been repaid in full will be written off. However, at the end of your IVA, you may be asked to remortgage or borrow against your property to clear your debts in full. Alternatively, your IVA may be extended.
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There are several debt solutions in the UK that can be used to improve your finances. Choosing the right way to tackle your debt could save you time and money, but the wrong one could cause even more harm.
It’s always best to find out about all your options from a professional before you take action.
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What are the pros and cons of an IVA?
What are the benefits of an IVA and what are the drawbacks? Below we have listed the most common positives and negatives of an IVA:
Positives of an IVA
- The monthly repayment is easier to manage than multiple repayments and is based on personal finances, ensuring it is more affordable
- You’ll be able to keep your property as long as you continue to make mortgage payments
- You don’t have to pay fees before the IVA is approved and active
- Fees payable to your IP are taken from your monthly payment – rather than an extra to pay
- Once the IVA term ends, your remaining unsecured debts are written off
Negatives of an IVA
- Your IVA is not guaranteed and creditors could reject the proposal
- An IVA negatively affects your credit score and is recorded on the Individual Insolvency Register, a public register
- Your personal spending is restricted during the IVA term and you’ll be subject to personal finance reviews to ensure you’re paying as much as you possibly can without entering financial hardship
- Failing to repay an IVA as agreed can result in bankruptcy
- If you have home equity you may be forced to borrow against it to repay more of the debt at the end of the IVA – or your IVA could be extended
Although the main advantages and disadvantages of an IVA are listed above, it is still essential that you receive debt advice before making a debt solution decision.
How does an IVA affect your life?
Having an IVA could impact aspects of your life, including your job, current assets and your future income and assets. You’ll also find it more difficult to get approved for credit during your IVA because your credit score will be negatively affected, and you will need permission from your IP to apply for credit above £500.
You might not be able to continue in some legal or finance positions once you have an IVA, or you may need to work under restrictions. Your current assets may be sold as part of the IVA agreement and any future income or assets you receive may need to be paid into the IVA. The latter includes things like a pay rise or money from a property or car sale.
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Does an IVA affect you forever?
An IVA does not have to affect your life forever and the restrictions placed on you will be lifted once the IVA has ended. However, it may take time to build your credit score back up and get approved for credit in the future.
The IVA will stay on your credit file for six years from the date it started. If you finish your IVA earlier it will remain on your credit report for the full six years but should be marked as ‘completed’. Your IVA is also recorded on the Individual Insolvency Register until three months after it has been finalised.
Is an IVA worth doing?
An IVA may be the most appropriate and advantageous debt solution for some people, but for other people, there may be a more suitable debt solution. The only way to be sure if an IVA is worth doing is to receive debt advice, which can be accessed for free with UK debt charities.
Debt advice services will assess individual situations and circumstances to recommend the most suitable debt solutions available to you. These services are available over the phone and sometimes online through the charity website.
Discover more about IVAs
We have dedicated a whole section of our blog to IVAs. With so many people considering using an IVA and wanting to know more, we thought it best to answer all of the general public’s most asked questions. Thanks for reading this free guide and we hope to chat about IVAs with you again soon!
*Note: This is a real life example based on a customers’ savings data in October 2020.