Over the past 18 months, the pandemic has caused financial changes in almost everyone’s lives. With nearly 9 million people being placed on furlough at the peak of the pandemic in May 2020, it comes with no surprise that many have struggled with covering basic expenses, let alone re-paying their loans and debts.
If that describes you, then we should start by being clear: you have options. Since the start of COVID-19, banks and other lenders have had to provide reasonable support to help you manage your debts. London Mutual is no different. You can find out more about how we can help here.
Individual Voluntary Arrangements (IVAs) are alternatives to dealing with debts. You may have seen these advertised as an ‘easy fix’ or ‘simple way out’ of debt. However, it is worth getting a full understanding of how they work before entering into one. They often come with hidden drawbacks, so it is important to know what you are getting yourself into.
What is an Individual Voluntary Arrangement (IVA)?
IVAs are a form of debt management that works by freezing your debts for a fixed period of time. 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 of time is over, any money you still owe will be canceled.
A professional insolvency practitioner will arrange your IVA. While many practitioners are professional and committed to helping you out of debt, there are some which are less reliable. You may have seen adverts on daytime or late-night TV, promoting ‘easy solutions’ to paying off debts. These adverts are targeted at people who are more likely to be in financial trouble.
Problems With IVAs
For some, an IVA could be the correct solution. But for many, what appears to be a straightforward solution, may leave you in more trouble than before.
Getting into 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 impacted negatively.
IVAs are not free and come with a set-up fee. Your monthly repayments will include the amount owed to the lender, plus your payment fees to the insolvency practitioner. Many practitioners operate in order to gain a profit, and it is likely that the majority of the money you are paying will go to them rather than towards your debt.
IVAs also come with conditions that could affect your financial independence. You may be asked to sell your car or other personal items depending on how expensive they are. If you receive an unexpected lump of money, say you are gifted or inherit some cash, you may be required to pay all of it into your IVA. Another condition could be that you have to re-mortgage your home to cover some of the money you owe. It is important to know what the conditions of your Individual Voluntary Arrangement will cost you.
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. After the IVA has ended, it stays on your credit file for 6 years. The IVA itself can last for 6 years, so this could be on your record for 12 years.
Legally, there are restrictions on your ability to borrow once you are in an IVA. In most cases, you will need written permission from your insolvency practitioner to borrow.
Alternatives to Entering an IVA
We sometimes see people who have chosen to get into an IVA before weighing up the options. It is very rare that an IVA should be your first option when it comes to sorting out your debts. There are lots of alternatives that avoid harming your credit and financial independence. Whatever route you go down will depend on your financial circumstances and income.
In some cases, an IVA is the best way forward. We suggest that if this is what you are planning, do as much research as possible. It would be in your best interest to find a not-for-profit insolvency practitioner as they are most likely to charge reasonable fees and respect your circumstances.
Speaking to your Creditors & seeking other advice
Don’t hesitate to contact your bank/credit company if you are finding it difficult to keep up with repayments. It is in the best interests of the lender and the borrower to find a solution to paying the debts off in a way that suits your situation. They might be able to offer you a payment holiday, payment plan, or re-scheduling the loan. This would be a better option than getting into an IVA straight away.
If this is the case, you should contact the creditor directly, as early as possible. Explain your situation to them, with any evidence you can provide to support your case.
It may also be in your best interest to seek independent impartial advice. Sometimes, when speaking to insolvency practitioners they will be motivated by their own profit to sell you the IVA, even though it may not be the best solution for you. You can find a list of independent not-for-profit organizations on our Money Gym page. They will also be able to advise on alternatives to IVAs such as debt relief plans (DRP) or debt management orders (DMO).
Work out if repaying is genuinely unaffordable
Although it is a big decision to sell your car or downsize to a smaller home, it may be a better option than an IVA. You might not think you can afford your debts, but making a lifestyle or financial change could help you greatly. Your IVA will be hanging over you for 12 years, within that time you could have downsized, paid off your debt, and be on your way to re-building the assets you sacrificed.
Debt Consolidation Loans
Debt consolidation loans combine all of your loans into one monthly repayment amount, with a fixed end date. This is a great solution if the amount you owe is fairly small, and if you have a regular income with money left each month. These loans usually have a lower APR meaning you will save money on interest too.
Streamline your finances by combining overdraft, credit cards and any other borrowing into one simple monthly repayment. Borrow up to £7,500 at 6.9% APR.Find out more