What Are the Pros and Cons of an IVA?
An Individual Voluntary Arrangement – or IVA – serves as an alternative to declaring bankruptcy. It functions as a kind of repayment plan, allowing you to keep hold of your valuable assets while you make payments towards your debt over a period of 5 years.
While these positives make the procedure seem like a no-brainer, there are some negatives to bear in mind. An IVA is a big commitment and some might be better off pursuing a bankruptcy instead.
So what are the advantages and disadvantages of an IVA? And is it the right choice for you?
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What Are the Advantages of an IVA?
You Can Keep Your Valuable Assets
One of the biggest advantages of an IVA is that it potentially allows you to keep hold of your valuable assets like your home and your vehicle.
While in bankruptcy you would be made to sell these assets for the benefit of your creditors, in an IVA your assets will be protected so long as you keep up with your agreed monthly payments.
However, towards the end of the IVA, you may be asked to release some of the equity you hold in your home to help repay your creditors.
You Can Continue to Trade and Act as a Company Director
Entering into an IVA won’t automatically affect your ability to be a Director of or manage a company or business, unlike some other insolvency procedures. It is therefore often a better debt solution for sole traders or Company Directors, depending on personal circumstances.
Your Debts Are Frozen
Once you enter into an IVA, all interest and charges on your debt are frozen by law. This puts a firm end to spiralling money problems.
Creditors Can’t Contact You Directly
Getting bombarded with letters and threats from creditors can be a hugely stressful experience, making it hard to enjoy your everyday life.
Once you begin your IVA, creditors will no longer be able to contact you directly. If they’ve got any concerns or questions, they’ll have to get in touch with your insolvency practitioner instead, saving you the hassle.
Protects You From Debt-Collection Efforts
Nobody wants a surprise visit from the bailiffs. With an IVA, you’re protected from all debt collection efforts so long as you keep up with your monthly repayments, helping to restore your peace of mind.
Debts Are Written Off
When you come to an agreement with creditors, you’ll propose to repay a certain amount of your debt over the course of 5 years. At the end of these 5 years, any remaining debt is liable to be written off. Depending on the agreement, this can save you lots of money.
What Are the Disadvantages of an IVA?
Negatively Affects Your Credit Score
Although an IVA might not have the same social stigma around it, creditors will see it in the same way.
An IVA – just like bankruptcy – will remain listed on your credit record for 6 years after its starting date. During this time you’ll find it hard to take out loans or purchase things on credit.
However, this isn’t necessarily a bad thing – being unable to borrow can make it easier to stay out of debt, helping you stay on track to a debt-free life.
Windfall Clauses
In order to secure the agreement of creditors, many IVAs contain windfall clauses.
A windfall clause kicks in when you receive a large unexpected amount of money – or windfall – through something like a family inheritance. Rather than keeping the money for yourself, you’ll have to pay it into your IVA.
This is tricky as 5 years is a long period of time – it’s hard to know if you’ll unexpectedly come into any money. Shorter insolvency procedures like bankruptcy minimise the risk of surrendering unexpected income.
You Can’t Have an Overdraft
If you’ve got an overdrawn bank account, it will be closed and all debts in the account will be added to your IVA. This is because all of your debts must be included in an IVA, not just a few. You can still have a bank account but you won’t be allowed one with the capacity to borrow any money.
Missing Payments Can Result In Bankruptcy
When you miss payments into your IVA, you get served with something called a breach notice. If you can’t resolve the problem, you could end up failing your IVA.
Failing an IVA will allow your creditors to contact you again, pursue legal action, and charge you for any historic interest that has built up while it was frozen under the IVA. This can result in you having to declare bankruptcy.
You should make sure your IVA is affordable for you – if you can’t realistically expect to keep up with the payments, you’ll be better off pursuing bankruptcy in the first place.
Is An IVA Right for Me?
IVAs can be a brilliant choice for dealing with unmanageable debts, allowing you to keep hold of your hard-earned assets through regular payments.
However, it isn’t always the right procedure for everyone: you might not have enough income security to ensure you can make your payments for the full 5 years, or your debts might be better suited to a Debt Management Plan (DMP).
Without proper guidance, it’s hard to know what is the right choice for you. Our expert insolvency practitioners can assess your situation and guide you to the best possible solution to your problems, getting you back on track to a debt-free life.
Get in touch to book a free consultation today.
