Besides personal bankruptcy, an Individual Voluntary Arrangement can be a viable alternative. This is a formal agreement between you and your creditors on how you will pay back part of your debt without going through bankruptcy. This arrangement is set up by a licensed insolvency practitioner, or IP. Before you take this approach, it is important that you understand the pros and cons of an IVA – find out more.
Basics of an Individual Voluntary Arrangement
Advantages
For people who are in debt and want to avoid bankruptcy, an IVA can be a good option. Here are some advantages:
– Monthly payments tailored to your affordability: The IP will review your income and expenses, then create a payment plan based on your financial situation and what you can afford. This approach enables you to pay back your debt without undue hardship.
– Asset protection: In a bankruptcy, the debtor typically has to liquidate some assets like a home or a vehicle. When you apply for an IVA, all of your personal assets will be taken into account. This allows for more protection compared to a bankruptcy and might help in excluding these assets in figuring out a debt payment plan.
– After the IVA, debt that you cannot afford is written off. The duration of a typical IVA is five years. After this, if there is any debt remaining, this is written off as debt that you cannot afford to pay. In this manner, your total debt is significantly reduced. This major reduction relieves you from the worry that you will never be able to pay off your debts, and it also allows your creditors to recover some funds that are owed to them.
– No cost to you upfront. When you apply for an IVA, you do not pay any fees upfront. Fees are customized and factored into your monthly installments. This makes your expenses more affordable.
– Creditors will no longer pressure you for payment, and interest stops accruing. When the IVA is in place, your creditor will no longer pressure you for payment. Interest on your debt ceases to accrue. If an IVA is approved, it does not matter if there is a creditor who does not agree to it because this arrangement is binding to all of your creditors. After the IVA is in effect, the IP will deal with your creditors so you no longer have to deal with them yourself.
Disadvantages
Although an IVA has many advantages, there are some implications that you should be aware of before you decide to proceed with this approach.
– Creditor approval is required. An IVA requires approval from your largest creditors; namely, those who hold a minimum of 75% of your total debt. If these creditors feel that a bankruptcy or other options will enable them to recover more money than what they can get from the IVA, and they reject the proposal, you will need to come up with another solution to pay off your debt.
– An IVA is public information. Similar to a bankruptcy, an IVA is public record and will appear on the Individual Insolvency Service register. This record remains public until three months after the IVA ends, at which point your information will be removed from the register. The risk with the public record is that it might have negative effects on your employment depending on your industry. Therefore, inform your employer or trade union if you plan to proceed with an IVA.
– Negative impact on your credit score. An IVA will have negative effects on your credit score and will make it more difficult for you to obtain more credit in the future. If you need to borrow money and the amount you need is greater than £500, you will need permission from your IP. The IVA information remains in your credit profile for six years after it goes into effect.
– The agreement is legally binding. An IVA gives you more flexibility in debt payment, but it is still a formal and legally binding contract. You are obligated to abide by the payment terms as expected by your IP and your creditors. If you do not, and you break the agreement, you will probably end up in bankruptcy.
On the other hand, being a legally binding arrangement can work to your advantage because it protects you from bailiffs and creditors harassing you for payment.
– It is not appropriate for all debts. IVAs are effective for unsecured debts, but they are not the best solution for all debts. For instance, IVAs are not appropriate for debts that are less than £10,000. In addition, debts that are secured or which include non-payment of child maintenance, fines, and student loans also cannot be included in an IVA.
