If I Enter an IVA, What Positive and Negative Effects can I Expect?

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Individual Voluntary Arrangements (or as they’re known in Scotland “Protected Trust Deeds”) can be formidable tools to change the balance of power from the creditor to the debtor. An IVA can halt the aggressive tactics of creditors towards debtors, such as threatening legal action and continuing to exacerbate the debt by adding penalty charges.

When it comes to an IVA, the upsides do outnumber the downsides, yet you as the debtor should be aware of the negative effects an IVA could have, as it’s also possible an IVA is not the best debt solution, the upfront costs of planning an IVA can be quite steep. Depending on the debtors’ circumstances, other debt plans or even bankruptcy might be more favourable than an IVA, so it’s best to talk to a qualified advisor to see which possibility is the best to go for.

To begin with let’s analyse the advantages of an IVA, it is a lasting solution to a chronic debt conundrum, either the agreed sum is paid or once the five years over (an IVA can only last five years maximum), the lingering debt is wiped by the creditors. If the IVA is too accepted, a majority of the creditors that also totals 75% of the debt must agree, if 25% stand firm there is nothing they can do to stop the IVA. An important plus point is it’s a legally binding arrangement between the debtor and creditor; they cannot insist on more money off the debtor or demand an increase in your monthly repayments, which they could request under a Debt Management Plan (they should not be contacting the debtor anyway, instead going through the IVA Practitioner who is acting as your administrator). Another of the major bonuses of an IVA is it will bring your overall monthly outgoings down, as the monthly IVA repayments are calculated to be at an affordable level so you have enough money to pay the essentials every month (mortgages, groceries, utilities etc).

Under an IVA it is possible to protect certain assets within the arrangement by specifically excluding them, it is possible to put the family home as an excluded asset. What this means is if the IVA were to fall short for any reason, the excluded assets could not be seized under any resulting legal proceedings. Don’t worry if you are self employed, the IVA extends to your company also, if you’re not working the creditors won’t get there debt back, it’s in their interest that your business is unimpeded, under bankruptcy this would not be possible. Some professions have limitations on bankrupt persons working (for example limited companies cannot have directors who have been declared bankrupt); an IVA does not make these insistences. An IVA also means you do not have to announce your bankruptcy to your employer and it won’t be announced in the local press either. To wrap up, an IVA offers privacy a bankruptcy never would, partly because of this the stigma that surrounds going into bankruptcy does not taint an IVA, which can give some deserved peace of mind knowing you have paid as much of your debt as you could within the five years and be full of pride by that fact.

Now for the negatives, many of the positives already mentioned have flipsides you should be aware of, the first fact to consider is that while you might feel relieved the creditors are restrained, you are also restrained in some of your activities. If the debtor fails to keep to the settlement, in most cases referring to the payment plan, the IVA can be declared void by the practitioner or one of the creditors, meaning the debtor could be declared bankrupt. The payment plan, as stated earlier, is intended to help make it easier, despite this the payment plans are very rigid and can only be changed under extreme circumstances; they cannot be changed on a whim. It’s important to point out that even under an IVA the repayments will leave you with very little disposable income, even if your income increases due to a new job for example, your payments will also increase to take this into account. The IVA practitioner will know of any income increases is the next disadvantage to an IVA agreement as is the obligation of annual reviews by the IVA practitioner, the debtor will have to keep records and all financial statements will be reviewed. Failure to meet the terms with this can invalidate the IVA as it is obligatory under almost all IVA’s. It should be obvious, but an IVA will be a black cloud over your credit rating, it will stay on your credit report for the length of the IVA and will stay on your credit rating for the first year after the IVA has ended. For this reason, attaining credit can be difficult to nigh on impossible in the medium term after the IVA has ended, during the IVA, taking on credit over £500 has to be authorised by the practitioner and that’s very unlikely to happen. Any unauthorised credit taken on will also break the terms of the IVA. While you can exclude your house from being part the IVA, the creditors would have to agree, if they do, in return the IVA might necessitate the debtor to release a portion of the equity from the house. Standard practice would mean the equity would not need to be released from the house roughly around the third or fourth year of the IVA.  To round off the negatives a simple reflection, an IVA lasts longer than bankruptcy would, bankruptcy usually lasts a year compared to an IVA’s five year plan.

Free debt advice provided by Emma O’Garrity. Emma is part of the team from JustClearMyDebts.com, giving all the latest news on debt solutions, credit card debt and IVA information.

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