Do I need a new bank account for my IVA?
In the majority of cases the answer will be yes and, usually, the sooner the new account is opened the better.
This is because most people with debt problems have at least one line of credit with their current banking provider.
But Why Change?
When things are going well and monthly repayments are being made on schedule, your bank are happy. They feel safe in the knowledge that your income gets deposited each month, thus reducing their exposure to risks.
However, when financial problems occur, it can become very difficult to maintain payments to all your creditors and when this happens payments get missed.
If you miss a payment to a creditor different to the bank your income gets paid into, there's very little that they can do about it, other than charge you late payment fees.
However, if you miss a repayment to a debt owed to the same bank your income gets paid into, they can, and probably will, take the payment automatically.
The right to 'set off'
This practice is perfectly legal and is known as a banks 'right to set-off', or combine accounts.
Banks use this technique to great effect because it diminishes their exposure to bad debt by pushing the problem along to the next creditor.
In the bank's eyes, so long as they are being paid, they're happy.
Making the break
So, if you're considering entering an IVA, it's very important to change your bank account provider and, instead, get yourself onto neutral territory.
Taking this action swiftly also ensures that all your creditors are being treated equally and that no particular creditor has an advantage over the others, something which would be an issue in an IVA.
As part of the preparation process, you will be advised to open a new account with a bank you don't owe any money to.
Basic bank accounts
The new account must also be a kind without any credit facilities such as overdraft, credit card or cheque book.
Basic bank accounts normally come with a debit card, to allow access to funds in the account.
Regarding all other aspects, the basic bank account is very similar to a regular current account, with most banks providing full facilities such as internet banking, direct debit and standing orders.
Summary
Protect yourself from your creditors right to 'set off' the balance in your accounts by opening a new basic bank account with a neutral bank.
You'll find opening the new basic account easier if you open it as soon as you recognise you're in financial trouble.
Once the new account is open, migrate all your household direct debit payments to the new account and notify your employer of your new bank details so your income gets paid into the new account.
Make sure you always have sufficient funds in the account to cover any expected payments as without an overdraft facility you will incur charges for being in the red.
