MARTIN’S difficulties began back in 2006 when he and his wife moved to Yorkshire and his financial circumstances changed.
Nine years later, he is unemployed and deeply in debt – he owes £85,000 on nine different credit cards, a personal loan and a ‘managed’ loan he took out to help him get out of trouble.
Martin has run out of options and he is now in the process of applying for an individual voluntary agreement (IVA) – a limited form of bankruptcy.
- 1 How Does IVA Work?
- 2 Which Debts Can You Pay Off With an IVA?
- 3 Which debts can’t you pay off with an IVA?
- 4 Types of IVA Plan
- 5 What assets can I keep?
How Does IVA Work?
- Have you got more than £7,000 of unsecured debt?
- Are you in debt with at least 2 creditors??
- Can you afford at least £50 monthly to pay towards your debts, regardless of being employed or self-employed?
The official Government website describes the Individual Voluntary Arrangement (IVA) as an agreement between creditors to pay all or part of your debts. You agree to make regular payments to an insolvency practitioner, who will divide this money between all your lenders.
Generally it does this by freezing all your debts and paying all your credit in a set duration of time.
After this set period, if you have been diligently following the set ground rules, then the remaining debts will be written off, hence you only apply if you can partially pay your debts but not its full amount. Proof of capabilities that you can pay your debt during the stipulated time, will also be required.
If by any chances you may be in possession of a large amount of money, IVA may be an alternative to paying off your creditors for sure.
Your proposal for the IVA should only be put together by a qualified professional called an insolvency practitioner. Their main role should not only be coming up with your initial proposal for your creditors but also, work with you during the whole stipulated time.
Generally, IVA is determined by two variables, which basically are your situation and circumstances in which your credit is on. This will be key not only to your Insolvency Practioner in coming up with the proposal, but also your creditors and the likelihood of them agreeing to your IVA plan.
An IVA is a legally binding agreement between you and the people you owe money to.
This means once you have signed it, neither you nor your creditors can back out.
So you need to make sure it’ accommodates all aspects of your debt situation and repayment plan during the 60-72 months (5-6years) it’s going to last
How Much Does an IVA Cost?
Since you can’t apply individually, the Insolvency practioner does come at a cost.
The payment is usually handled in two ways
- By paying a setup fee that you have agreed with your Insolvency Practitioner, to enter the agreements and any other cost associated with it. This price most likely may be high, and some have claimed to pay as much as £7000.
It’s highly likely, depending on your debt situation, you can be forced to use your savings or personal pension if you are retired, as well as selling any high valued assets such as jewelry, to afford this.
You will also need to pay the handling fees as agreed by your IP for the contract and annual costs
Please note that you do not under any circumstances, pay for any charges before your IVA has been set up.
Which Debts Can You Pay Off With an IVA?
You can use an IVA to help pay off many common debts, including:
- Personal loans
- Catalog debts
- Council Tax arrears
- Hire purchase debts
- Mortgage shortfalls
- Credit and store cards
- The money you owe to HM Revenue & Customs, like income tax or National Insurance contributions.
Which debts can’t you pay off with an IVA?
You can’t use an IVA to pay off:
- Student loans
- Magistrates’ court fines
- Certain types of car finance
- Child maintenance or Child Support arrears.
Mortgage and Rent Arrears
Technically, you’re allowed to include mortgage and rent arrears and other secured loans against your property in an IVA.
However, many are the times creditors have refused to include this clause in the plan.
This is one of the more reasons you need to confirm with your debt councilor on what you can include or not in your IVA plan
Types of IVA Plan
1: Full and final IVA
- This is whereby you make a one big payments to your lendors.It is usually recommended if you to those who readily have huge loads of cash to repay to their unsecured credit.
- This specific type of IVA is tailored for business owners who don’t need the added stress that comes with managing debts for their business.
What if I miss a repayment?
- Depending on the number of times you have missed your repayments and your reasons for it, your creditors may choose to force you into filing for bankruptcy, this however should be the worst-case scenario most of the times, if you miss your payment at least once due to an exceptional scenario then the creditors may pass a blind eye, and consider it as one-off issue. It’s only if you stop the payment as a whole that things turn for the worse.
What assets can I keep?
- The major advantage of IVA over bankruptcy is that it protects one from repossession by creditors. However, if you own a large equity in one of the properties; the creditors will expect a certain amount to be remortgaged to help in the debt repayment.
- Most likely, they will focus on your unsecured debts.
How does an IVA Affect Your Credit Rating?
Your IVA will be listed on the Individual Insolvency Register, an online database used by credit reference agencies to update your credit rating. It’s harder for you to open new bank accounts, get loans or buy on credit if you have an IVA.
What if my Financial Circumstances Change During the Period?
It is your responsibility to ensure your creditors are notified of any financial change or circumstances.eg: you may be in luck, and inherit a large sum of cash, or worse may come and you end up losing your job, you are required to convey this as soon as possible for your creditors to update and possible review the agreement to suit the change of circumstance.
It should also be highly stressed that people should thoroughly and diligently research the practioner/supervisor before proceeding or making any cash payments, as they have been cases of conmen in the industry wrongly recommending IVAs when it was not the ideal choice for example, in place of bankruptcy or another debt management plan that would have been more viable.
It’s also good to point out that IVAs should only be considered for people in serious debt almost to bankruptcy.IVAs are not immediate quick-fix solutions or way out methods for paying debts. The primary reason for this being, though your debt will be paid at a reduced level, it will most likely take a longer period than the initial debt time.