What you need to look out for when entering an IVA!


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. Creditors can be overly aggressive and put pressure on debtors by threatening legal action and adding penalty charges to existing debt, an IVA can put a stop to this.

While the positives do outweigh the negatives, it’s important to be fully informed on what the downsides of an IVA can be, as under certain circumstances an IVA might not be the best debt solution, the upfront costs of establishing 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 course of action is the best to decide on.

To begin with let’s analyse the advantages of an IVA, it is a enduring solution to a continual debt difficulty, either the agreed sum is paid or once the five years are up (an IVA can only last five years maximum), the lingering debt is wiped by the creditors. To secure an IVA, a simple majority of the creditors representing 75% of the total debt value have to agree to the IVA, if 25% refuse to accept there is not anything they can do to obstruct the IVA. An important upside is it’s a legally binding agreement between the debtor and creditor; they cannot claim more money off the debtor or demand an increase in your monthly repayments, which they could do 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). Probably one of the most important bonuses of an IVA is it actually brings your monthly expenditure down, as the monthly IVA repayments are calculated to be at a reasonable level so you have enough money to pay the requisites 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 be unsuccessful 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 restrictions on bankrupt persons working (for example limited companies cannot have directors who have been declared bankrupt); an IVA does not make these impositions. 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. One final point to consider is that the stigma and negativity which surrounds bankruptcy does not surround an IVA which can help put give a measure of reassurance 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 being while the IVA formal agreement can protect you from the creditors, the debtor is also bound by the agreement. If the debtor fails to keep to the settlement, in most cases this will almost certainly involve the repayment plan, the IVA can be declared void by the practitioner or one of the creditors, resulting with the debtor being declared bankrupt. It has already been stated in the article that repayment schedule is designed to make it easier, however whatever the agreed amount it will be totally inflexible, you will only be able to change the amount paid 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 supervisor will know of any income increases is the next downside to an IVA agreement as is the commitment of annual reviews by the IVA supervisor, the debtor will have to keep records and all financial dealings will be reviewed. Failure to meet the terms with this can invalidate the IVA as it is compulsory 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 period of the IVA and will stay on your credit rating for the first year after the IVA has been completed. 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 illicit credit taken on will also flout the IVA. While you can prevent your house from being part the IVA, the creditors would have to be in agreement, if they do, in return the IVA might entail the debtor to release a portion of the equity from the house. Common practice would mean the equity would not need to be released from the house till approximately the third or fourth year of the IVA. To round off the negatives a simple observation, 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 credit card debt, debt solutions and IVA information.

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