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Thinking of an IVA? – Be sure you know the facts

Friday 03rd Mar, 2023

 

Individual Voluntary Arrangements (IVAs) are being widely marketed in television and newspaper adverts as an easy and straightforward way to wipe off your debts and make a fresh start.   However, as with many things, the truth is likely to be quite different, as they come with major drawbacks and often unexpected long-term consequences.

The commercials may cheerfully promote the idea that these firms are helping people by relieving them of their debts.  But always remember that any debt help or insolvency companies that advertise on TV or in print are there to make money out of you.  According to Martin Lewis, Money Saving Expert: “While in the short term their plans will make your payments lower, in the long run it'll cost you dear. Avoid them. Don't touch them. Don't go near them.”  

Before getting tied into something that you may come to regret, it’s vital to get free impartial advice from a reputable source to help you see the full picture and understand what options best suit your situation.  

 

What are IVAs?

IVAs are a legally binding form of debt management that work by freezing your debt for a fixed period, usually of 5-6 years.  During that time you must commit to paying a monthly amount towards your debt. After the fixed period, any money you still owe will be cancelled but only if you have made all your agreed payments and not been in breach of your agreement.

 

What problems can arise with IVAs?

An IVA is arranged through firms called insolvency practitioners.  While some do aim to offer genuine help, unfortunately many are less reliable and motivated more by the fees they will earn than your best long-term interests.

IVAs are not free and come with a set-up fee.  Often this can be £4,000 to £5,000.  Your monthly repayment will be set to cover both the amount owed to the lenders and your IVA provider’s fee.  But the fees will be paid first.  So, it’s very likely that the majority of the money you are paying will go to them rather than to reducing your debt.

IVAs also include conditions that will affect your financial independence.  You may be asked to sell your car or other personal items of value.  Any savings will be taken in and if you receive an unexpected gift or an inheritance you may have to pay all of it into the IVA.  You may even have to re-mortgage your home to cover some of your owings.

Your IVA could affect your ability to borrow for up to 12 years.  The arrangement will appear on your credit history and make it very difficult to obtain such basics as phone contracts and credit cards.  There may be legal restrictions to stop you borrowing even from family or friends or take up salary benefits like cycle to work schemes and season ticket loans.  In most cases you will need to get written permission from your insolvency practitioner.

 

What if you struggle to make your payments or your circumstances change?

If you fail to keep up your IVA repayments, your insolvency practitioner will send you a notice of breach and give you up to a month to respond and put things right.  But if you don’t contact them or can’t make up the payments they will end your IVA.  You will still owe your creditors who can pursue their debt.  The debt may be higher than you expect because the majority of payments to this point have gone to your IVA provider as fees.  Your IVA provider may also make you bankrupt.

We often see people who have chosen to get into an IVA without fully understanding all the consequences.  IVAs and bankruptcy should always be seen as a last resort and in many cases are not needed, as there may be other steps you could take with a better long term solution.   Do some research and seek help from a free impartial not-for-profit debt advisor.

 

What could you do instead?

• Talk to your creditors and try to come to an arrangement with them – this may seem daunting at first but it is in the best interests of lenders and borrowers to find a suitable solution, such as a payment holiday or re-scheduling the loan to reduce your payments. These options are not available once an IVA is in place. 
• Consider some lifestyle or budgetary changes – have you reduced your spending as fully as you can? Have you maximised your income?  Are you getting all the benefits you qualify for?  Our Financial Wellbeing page contains links to benefit checkers here.
• Restructure your lending by combining several high APR loans into one loan with lower monthly repayments. Approach your ethical credit union about this possibility, with repayments that you can comfortably afford.   
• Consider selling your car or downsizing your home. These steps may appear drastic but may help you to pay off your debts and rebuild your financial security sooner than you could break free from the restrictions of an IVA.   
• Seek independent free advice from one of the not-for-profit debt advisors that will act in your long-term best interests and not be motivated by making money out of you.

In a small number of extreme cases, a formal debt solution such as IVA may be the only way forward.  But that step should never be taken lightly and never before taking other independent advice.  

This article is for general information only and does not constitute financial, legal, or any other form of advice.

 

JES

Updated 24 Feb 2023

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