A lot of information has been written about IVAs and it’s important to recognise that they are not suitable for everyone. Like other UK debt advice charities we will only suggest the option of an IVA if it is right for your circumstances. We will also tell you up front what happens when an IVA fails so you know exactly what taking on an IVA means. We describe our approach to IVAs as “straight talking”.
Whilst an IVA will reduce the amount that you pay back to your creditors, it is unlikely to be as much as 90%, which is a figure you may sometimes see quoted. What actually happens is that an IVA adviser helps you and your creditors to reach an agreement about how much money you can reasonably afford to pay back each month, after your living costs have been taken into account. How much debt is written off depends on your circumstances.
An IVA can, however, be a very effective solution for some people. In reality, an IVA will write off between 50% and 60% of an average debt of just under £60,000. Such a typical IVA would mean a reduction in the money owed to between £25,000 and £30,000.
Interest and charges on any debts included in the IVA will also be stopped, you won’t have to sell your home as part of the agreement (although you might be asked to release some of the equity in your home at the end of the IVA – only if you can afford to) and your creditors cannot take any further enforcement action against you, such as petitioning for your bankruptcy.
However, once you have started an IVA, you need to keep making the payments you have agreed to for the full five year term or your IVA could be unsuccessful. If there’s a good reason why you’ve been unable to continue making your payments (if your circumstances change, for example if you lose your job) then your Insolvency Practitioner (IP) can go back to your creditors and try to renegotiate your monthly payments (this is called a ‘variation’). Whilst over 90% of IVA variations are approved by creditors, there is a chance that your creditors will not accept the new terms. If this happens or if you consistently miss payments without contacting your IP then your IVA will fail and you may be left with Bankruptcy as the only realistic option available to you. For this reason we will only suggest an IVA if it is suited to your financial circumstances.
Whilst your creditors will agree to your Insolvency Practitioner receiving a fee from your monthly payments for managing the IVA, it’s important to keep in mind that if your IVA fails, any fees paid up to that point will not be recoverable.
It’s also important to bear in mind that if you benefit from a significant windfall during your IVA (such as winning the lottery, receiving PPI compensation or seeing the equity in your house rise) and are able to pay off your debts in full as a result, then your creditors will expect you to meet the IVA fees in addition to your original debt.
These rules apply to all charities and commercial organisations alike, although it’s important to recognise that there are firms that charge part of their fee upfront. By using a firm that charges fees before your creditors have agreed to your IVA proposal, you are risking losing the money you have already paid.
The advantages of an IVA
- Part of your debt will be written off (50% to 60% typically).
- You can keep your house (although you will have to release any equity to help pay your debts).
- Interest and charges are stopped on any debts included in the arrangement.
- Your creditors are legally prohibited from taking any further enforcement action such as petitioning for your Bankruptcy.
- By repaying what you can, you emerge after five years with your finances back on track.
The disadvantages of an IVA
- You must keep up payments for five years or risk Bankruptcy (any fees you’ve paid up to that point will not be recoverable).
- You must release any equity in your house to help repay debts.
- The payments you make can go up if your income increases or if your expenditure reduces during the five years.
- The IVA will affect your credit rating for a period of six years from the date the IVA begins (whilst most people will take the view that resolving an existing debt problem is more important than their ability to take on additional debt over the next six years, it’s still important that anyone considering entering into an IVA is fully aware of the consequences).
If you’re unable to call our free debt helpline number 0800 043 40 50 right now, you can fill in the form below and one of our advisors will call you back at a time of your choosing.