If you’re struggling with debt, you’ve probably seen adverts for Individual Voluntary Arrangements (IVAs) that make them sound like a quick fix. While they can help in some situations, there’s more to the story than those adverts tell you.
Before you make any big decisions about debt, it’s worth understanding exactly what an IVA involves and what other options might be out there.
What you should try first
Here’s the thing about debt problems — you’ve got more options than you might think. If you’re finding it hard to keep up with payments, don’t assume an IVA is your only way out.
Since COVID-19, banks and other lenders have had to provide reasonable support to help people manage debts. At London Mutual, we’re no different — you can find out more about how we can help here.
The key is acting early. Don’t wait until things get really tough before reaching out.
What actually is an IVA?
An IVA is a formal legal agreement between you and your creditors to pay back debts over a fixed period, usually 5-6 years. It freezes interest and charges on your debts, and you make affordable monthly payments based on your income and circumstances. Once the agreed period ends, any remaining debt is written off.
It’s legally binding, which means once it’s approved by creditors representing at least 75% of your debt, neither you nor your creditors can withdraw from the arrangement.
A licensed insolvency practitioner arranges your IVA and handles the process. While many practitioners are professional and genuinely focused on helping people resolve their debt problems, it’s worth noting that some use aggressive marketing tactics, particularly targeting people who may be vulnerable due to financial stress.
The reality of IVAs
For some people, an IVA can be an effective way to manage unmanageable debt and get back on track financially. However, it’s important to understand what’s involved before making this significant financial commitment.
An IVA is a significant financial commitment that should be considered carefully. While it can provide a structured way out of debt for those who genuinely cannot meet their current obligations, there are some important considerations you should be aware of.
Costs and fees
IVAs involve fees for the insolvency practitioner who sets up and manages the arrangement. These fees are typically deducted from your monthly payments, so it’s important to understand exactly how much of what you pay will go towards reducing your actual debt versus covering administration costs.
Plus, IVAs often include specific conditions that you’ll need to agree to. These might include restrictions on certain types of spending, requirements to contribute any unexpected windfalls like inheritance towards the arrangement, or potentially releasing equity from your home in the final year if you’re a homeowner.
Impact on future borrowing
An IVA will appear on your credit file for six years from the start date, which will affect your ability to obtain credit during this time. While you’re in the arrangement, you’ll also need permission from your insolvency practitioner to borrow more than £500.
Considerations for armed forces personnel
If you’re serving in the UK armed forces, there are additional factors to consider. You’re required to inform your chain of command about an IVA, as it’s considered a significant financial arrangement. This disclosure requirement exists because financial difficulties can potentially affect security clearances and certain career paths within the armed forces.
Alternative approaches to consider
While an IVA can be the right solution in certain circumstances, it’s worth exploring other options first, as these might be more suitable for your particular situation.
Just pick up the phone
This might sound obvious, but have you actually spoken to the people you owe money to? Banks and credit card companies deal with this stuff all the time, and they’d often rather work something out than lose the money altogether.
Ring them up, explain what’s going on, and see what they say. They might offer a payment holiday, a different payment plan, or even write off some of what you owe. The earlier you call, the better.
Get some independent advice
Before you talk to any insolvency practitioners, it’s worth getting advice from someone who doesn’t have a financial stake in your decision. Some practitioners earn good money from setting up IVAs, so they might push you towards one even if it’s not your best option.
Check out our Money Gym page for a list of independent, not-for-profit organisations that can help. They can also tell you about other options like debt relief plans or debt management orders.
Could you actually afford to pay it back?
This one’s tough, but worth thinking about. Would selling your car or moving somewhere smaller actually solve the problem? It might feel drastic, but it deals with things immediately.
Remember, an IVA hangs over you for 12 years. In that time, you could downsize, pay everything off, and be well on your way to rebuilding what you had to give up.
Consolidation loans
If what you owe isn’t too large and you’ve got regular income with a bit left over each month, a consolidation loan might work better. These roll all your debts into one monthly payment with a clear end date.
They usually come with lower interest rates too, so you can actually save money. At London Mutual, we offer consolidation loans starting from 16.9% APR with no setup fees. Just bear in mind that we can’t offer them to everyone — it depends on your circumstances.
Making the right call
An IVA might look tempting when debt feels overwhelming, but it’s worth understanding exactly what you’re signing up for. The restrictions and long-term impact on your finances — and potentially your career — are pretty serious.
Before you even think about an IVA:
- Have a proper chat with the people you owe money to
- Get independent advice from organisations that don’t benefit from your decision
- Think honestly about whether some lifestyle changes could help you pay things off differently
- Look into consolidation loans if your debt levels aren’t too crazy
Remember, once you’re in an IVA, that’s it for the next few years. Nobody can change their mind. Make sure you really understand what you’re agreeing to before you sign anything.
The most important thing? Don’t wait until you’re drowning before you ask for help. There are people out there who genuinely want to help you find the right solution — not just the most profitable one for them.
