What is an IVA and why are they so popular?
This is a guest post by Sara Williams, who blogs at her website Debt Camel about everything to do with debt and credit ratings.
If you have ever seen an advert or been cold-called offering to wipe off 80% of your debts, you may have wondered if was a scam. It’s not – there is a real product called an Individual Voluntary Agreement (IVA) that can help some people with big debt problems.
IVAs have just hit record numbers. More than 27,000 were started in the first three months of 2018, the largest total since IVAs were invented in 1985.
What is an IVA?
An IVA is a formal legal contract between you and your creditors, all the people you owe money to. It has to be set up by an Insolvency Practitioner, who usually works for a firm that specialises in running IVAs.
IVAs can be very “individual” but most of them follow this pattern:
- The IVA firms works out how much you can afford to pay each month at the moment. That may be a lot less than you are paying to your debts now if you are struggling.
- Your creditors are asked to accept this amount for 5, sometimes 6, years and at the end of that the rest of your debts are written off.
- The monthly payment isn’t fixed – it will go up if you can later afford more. Each year your IVA firm will look at your bank statements and payslips to check this.
- Sometimes the monthly payment can reduce but often you have to take a payment break if you have problems, so the IVA goes on for longer.
- If you inherit money or get a PPI refund that all goes to your creditors. The idea is that for 5 or 6 years you pay as much as you can.
- You can’t borrow any money when you are in an IVA. This includes re-mortgaging.
- It is a sort of insolvency and it wrecks your credit record for 6 years in exactly the same way that bankruptcy does. This makes it hard to rent anywhere as you are likely to fail the credit check.
- In the last year of your IVA if you have a house you are asked to re-mortgage so you can pay some more money to your creditors.
Who do IVAs work well for?
IVAs can be the perfect debt solution for people who can say Yes to all three of these:
- They have some spare income each month, and
- They have assets to protect, typically a house with equity, and
- It would take too long to repay their debts even if interest was frozen.
If you say No or aren’t sure about any of those, there are other options to look at.
If you have very little spare income, you are renting and your debts are under £20,000 then a Debt Relief Order may be much better for you. It’s all over in a year and you don’t have to make any payments at all!
If you don’t have any assets to protect, then an IVA could be a very long and expensive alternative to bankruptcy. Bankruptcy is not worse for your credit record or getting a mortgage in future than an IVA. Five out of six people don’t have to make any monthly payments when they go bankrupt.
If you could pay your debts in a reasonable time if interest was frozen, you should look at a Debt Management Plan (DMP) instead. You don’t get any debt written off, but DMPs are more flexible and they can’t fail. Also many people think it’s right to repay the money that they borrowed.
Why are there so many IVAs at the moment?
That is an interesting question! Without someone looking in detail at who is being signed up for IVAs and whether they have any better alternatives, there is no hard evidence.
But we know a few facts:
- IVA firms make thousands of pounds for running an IVAs. That is how they can afford to advertise and call call/text.
- No one makes any money from Debt Relief Orders or bankruptcy – so no firms ever advertise them. They are good solutions but they don’t make profits for firms.
- The early failure rate of IVAs is getting worse. In the first two year, 1 in 8 IVAs has already failed. Overall more than a quarter of IVAs fail.
This suggest that some IVAs are being mis-sold to people.
We don’t know how many, but you need to make sure that an IVA is right for you and your family. A failure is disaster as it leaves you back with all the debts plus the IVA fees.
Getting help to make the right decision
This is a very big decision. It’s best to talk to someone who won’t make any from you whatever you decide.
Go to your local Citizens Advice if you would like to sit down with an advisor. Or phone National Debtline, if you prefer the telephone.
If Citizens Advice or National Debtline say an IVA is right for you. If it is, you can be more confident about your decision and talk to an IVA firm. If an IVA isn’t right, then you can look at your options.
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