Individual Voluntary Arrangements (IVAs) might seem like a straight-forward solution to repaying debt, but it is important that you know the consequences before getting tied down.

The pandemic and cost of living rises have caused financial changes in almost everyone’s lives and left many struggling to cover day to day expenses. Individual Voluntary Arrangements (IVAs) are often advertised as an “Ëœeasy fix’ or “Ëœsimple way out’ of debt. However, this is far from the full picture they  come with hidden drawbacks, and significant long term consequences. It is important to know what you are getting yourself into and vital that you get free impartial advice from a reputable source.

“I didn’t know I was not allowed to have a loan without the insolvency practitioners permission and then only up to £500 for the whole 5 years of my IVA”

What is an Individual Voluntary Arrangement (IVA)?

IVAs are a form of debt management that works by freezing your debts for a fixed period. These agreements are legally binding, meaning neither you nor your creditor can back out of them. They are usually fixed on a 5-6 year period, within which you must commit to paying a monthly amount towards your debt. Once the period is over any money you still owe will be cancelled but only if you have made all the agreements payments and have not made any breaches of the agreement.

A professional insolvency practitioner will arrange your IVA. While many practitioners are professional and aim to help you to manage your debts, there are many which are less reliable. Many are motivated by the fees they will earn rather than your best long-term financial interests.

Problems With IVAs

For a small number of people in specific circumstances an IVA may be the best solution. But for many, what appears to be a straightforward easy solution, may leave you in much more trouble than before.

Entering an IVA should be a last resort for re-paying your debts. Unfortunately, there are cases where persuasive insolvency practitioners have encouraged people into an IVA without properly explaining the consequences. Ultimately, if you do not understand the drawbacks of an IVA, your financial independence and ability to borrow in the future could be badly impacted.

Financial Costs

IVAs are not free and come with a set-up fee. The minimum fee cap is £3650 and can often be £4,000 to £5,000. Your monthly repayments will include the amount owed to the lenders and the fees to the insolvency practitioner. However, the fees to your provider will be paid first. It is very likely that the majority of the money you are paying will go straight to them rather than towards your debt.

Financial Freedoms

IVAs come with significant conditions that will affect your financial independence. You may be asked to sell your car or other personal items depending on how expensive they are. Any savings will go into the scheme and if you receive any unexpected lump sum of money as a gift or an inheritance you may be required to pay all of it into your IVA. You may even have to re-mortgage your home to cover some of the money you owe.

Ability to Borrow in Future

Your IVA could affect your ability to borrow for up to 12 years. The arrangement will be added to your credit history and will often make it very difficult to borrow. Even basic borrowing such as phone contracts and credit cards are unlikely to be accepted.

Whilst in the IVA there are legal restrictions on your ability to borrow even from family and friends or salary reduction scheme like cycle to work schemes and season ticket loans. In most cases, you will need to get written permission from your insolvency practitioner to borrow.

What happens if you struggle to make your IVA payments, or your circumstances change?

If for whatever reason the agreement fails before the end of the agreed period, then you will still owe your creditors and can be pursued by them. Remember of the payments you have made to that point the majority is likely to have gone to your IVA provider as fees.

If you miss a payment at any point your insolvency practitioner will send you a “Ëœnotice of breach’. This will ask you to explain what went wrong and to put it right. Most IVAs will give you up to 1 month to respond to a notice of breach. If you respond on time and agree how you’ll pay any missed payments, your insolvency practitioner won’t take further action against you. However, If you don’t contact them or can’t make up the payments they will end your IVA. You will still have all the negative consequences of the IVA but still owe the debts. Your IVA provider may also make you bankrupt.

Alternatives to Entering an IVA

We regularly see people who have chosen to get into an IVA without fully understanding all the consequences. Many regret their decision but are  trapped in the agreement. It is very rare that an IVA should be your first option and there are lots of alternatives that avoid harming your credit and financial independence. Do as much research as possible we strongly recommend seeking the help of an independent not for profit debt advisor.

Speaking to your Creditors

It may at first seem daunting but the first thing to do is speak to the organisation who you are having difficulty keeping up your repayments. It is in the best interests of the lender and the borrower to find a suitable solution. They might be able to offer you a payment holiday, payment plan, or re-scheduling the loan. These options are not be available once you have arranged an IVA.

Seek Independent Advice

You can find a list of independent not-for-profit organizations HERE. They will act in your long-term best interest and can advise on alternatives to IVAs such as debt relief plans (DRP) or debt management orders (DMO).

Consider what changes you can make to your financial circumstances

You might not think you can afford your debts but making some lifestyle or financial changes could help you greatly. Have you reduced your expenditure as far as possible? Have you maximised your income? Are you getting all the benefits you are entitled to? Our guide to managing your money can help with these questions and includes links to benefit checkers HERE .

If you have several loans with high APRs it may be possible to restructure your lending into one loan with a lower monthly repayment. It is vital that you ensure the new monthly repayment is affordable. The best way to achieve this is by going to an ethical lender like a credit union. Just Credit Union provides a LOAN CALCULATOR so once you have worked out your income and expenditure you can check find a loan amount and repayment that you can comfortably afford.

Selling your car or downsize to a smaller home is a big decision but may be a better option than an IVA. Your IVA will have consequences for many years and within that time you could have downsized, paid off your debt, and be on your way to re-building your financial security.

Key Actions

• Work out your income and expenditure
• Check who you owe money to and on what terms
• Speak to the people you owe money to and try to come to an arrangement with them
• Consider what other options are available to you
• Seek independent free reliable advice
• Never enter an IVA without taking other advice
• Never enter an IVA without understanding the consequences