IVA Pros and Cons
As with every debt solution, there are going to be advantages and disadvantages that come as an integral part of an IVA.
Judging the importance of the different Pros and Cons will be down to each individual's point of view. For some, the sense of protection from their creditors provided by the IVA will be the most important aspect, whereas for someone else it may simply be the ability to continue trading as a director or practicing their chosen profession.
Whatever your thoughts, we felt it would benefit you to read the most often discussed Pros and Cons, so you could decide for yourself.
IVA Pros:
- Protects your home. An IVA allows you to protect the equity in your home and stops creditors from forcing you to sell it to release your equity.
- Protects your income. An IVA acts as an alternative to bankruptcy for people whose professional status prohibits bankruptcy as an option. Police officers, armed service personnel accountants and lawyers for example are all able to enter an IVA whereas bankruptcy is barred.
- Prioritises secured debts. An IVA makes sure sufficient budget resources are earmarked towards your mortgage and other secured loans, such as HP agreements, ensuring you don't default due to lack of funds. Remember, defaulting on your secured loans could result in your property being repossessed, something which should be avoided if at all possible.
- Fixed duration. IVAs have a fixed timeframe and once the timeframe is completed the IVA completes, even if you haven't managed to repay all your original debts. In most cases this will result in a significant proportion of your debt being legally written-off by the IVA.
- Payments based on affordability. Before you enter the IVA an assessment is undertaken to establish exactly how much you will be able to afford towards your IVA payments. The IVA can only expect you to provide what you have leftover after your personal living expenses have been accounted for, making sure you only pay what you can afford.
- Freezes interest. Creditors are legally obliged to freeze any further interest charges on your debts for the full duration of the IVA. This ensures that the debts are crystalized and stop growing
- Stops legal action. As part of the terms and conditions of the IVA, the creditors must agree to refrain from taking any legal action against the applicant in pursuit of any outstanding debts. The IVA provides protection from creditors who might otherwise threaten to take action in order to force you to increase your payments
- Blocks late payment charges. Creditors must also refrain from levying late payment charges. This, with the combination of freezing interest means the debt stops rising away out of control.
- Legally binding on creditors. Once the IVA has been agreed by the necessary majority of your creditors, they are all legally bound by its terms, whether they voted to accept it or not. This stops creditors from breaking ranks and chasing the debt on their own
- Private process. Whilst IVAs are listed on the public Insolvency Register, it is actually referred to as a private arrangement because, unlike as happens with bankruptcy, your name is not published in the London Gazette and your tax code does not get altered.
- Blocks pestering calls. Once the IVA has begun, creditors must refrain from contacting you regarding the debt. Instead the creditor must redirect any contact to the IVA supervisor at your Insolvency Practitioner's office.
IVA Cons:
- Impacts your credit rating. Unfortunately, entering into any payment arrangement with your creditors will have a detrimental effect on your credit rating, and this includes entering into an IVA. For the full duration of the IVA you will also have to volunteer to refrain from taking any form of credit. Your creditor rating will be effected for a total of 6 years, after which you will be at liberty to apply for credit of all types including mortgages if you so wish.
- Reduces bank facilities. As a consequence of your credit rating be effected you will lose the opportunity to have an overdraft, a credit card or cheque book through your new bank account. You will however, be able to benefit from all other aspects of modern day bank accounts, such as online facilities, Direct Debits, Standing Orders and a Debit Card useful for electronic withdrawals.
- Unsecured debts only. An IVA can only address financial problems surrounding unsecured debts. If you are experiencing financial troubles with secured debts, such as mortgages, secured loans or Hire Purchase agreements, then an IVA will struggle to be of any use. You should still call us to discuss your options however, and a solution may still be found
- Legally binding on you. A legally binding agreement is like a double edged sword. It brings advantages to you by binding your creditors to the terms of the IVA, but it also binds you too. So, if you experience problems maintaining your IVA commitments, making changes will require re-proposing a variation to the original agreement and seeking approval from your creditors, which will be by no means guaranteed.
- No cancellation period. Once the IVA begins there's no turning back as an IVA cannot simply be cancelled should you change your mind. Creditors like the fact that there is no cancellation for it adds a sense of commitment to the process for those who want to apply. This is why you should be very sure you are happy with the IVA before you commit yourself.
- Modest budget. You will be expected to keep to the IVA budget outlined in your proposal, with few opportunities to make adjustments along the way. The budget constraints upon you will limit your expenditure on items classed as luxuries by creditors, such as smoking. So it's most important to understand your budget and ensure it's fair and realistic.
- Annual reviews. Every 12 months your supervisor will want to undertake a review to ensure your circumstances haven't improved sufficiently to increase your IVA payments and, to this extent, you will be expected to provide your most recent bank statements and wage slips each year.
- Takes any windfalls. There is a clause within the IVA which deals with any extra money or wealth that may come your way whilst you are in an IVA. This is called the 'Windfall Clause' and under this clause you will be required to inform your supervisor of any financial windfall you receive during the IVA and introduce the windfall into your IVA. This would include a lottery win, an inheritance an insurance payout or a redundancy payment, though exceptions can be made in the case of redundancy or critical illness payouts, though this would be at the sole discretion of the IP.