If you are struggling to manage your growing debt, you might be feeling helpless, daunted and regrettably uninformed. Debt management options are not generally considered appropriate topics for everyday discussion and as such, it is perhaps understandable that not all of us know what avenues are open to us to get us back on our feet financially. For those who dread the prospect of bankruptcy, you will be glad to know that there are valid alternatives.
Individual Voluntary Arrangements (IVAs) were introduced as a debt management option in 1986. They might be a suitable solution for you if you owe £6,000 or more to more than two creditors and you have a stable income. An IVA is a formal agreement, arranged with the assistance of a licensed Insolvency Practitioner (IP), who acts as the intermediary between you and your creditors. You pay your IP a monthly sum which is then distributed among your creditors.
You will be charged a fee
Your IP is legally required to charge you a fee for setting up and supervising the registration of your IVA. This fee is usually between £1,000 and £1,500 and this charge may have to be paid upfront. On top of this charge is an ongoing ‘supervisory fee’. This will usually come at the cost of approximately £500 per year and will be deducted from the monthly sum you pay. It is important to be aware of this financial commitment upfront before you decide how to proceed.
Only certain debts can be included
Not all debts can be included in an IVA. As of 2009, student loans are excluded, along with Council Tax arrears, rent, child maintenance arrears, criminal fines and secured debts such as mortgages. Typically any unsecured debts are included in an IVA, including personal loans, credit card debt, store cards, overdrafts and HMRC debts. It is not possible to favour one creditor over another and to decide what debts are included in an IVA. All unsecured debts will have to be included.
Your monthly payable sum is dependent on many factors
The amount of money you pay each month to your IP will be dependent on factors such as your salary, your investments, the value of your assets and the equity in your home. This amount is somewhat flexible, as each year your current circumstances are taken into account. If your income has been reduced, or there is a good reason for an increase in expenditure, it is possible that your monthly sum may be decreased to ensure you can still repay your debts and live comfortably.
You get to retain certain assets
There are many misconceptions surrounding IVAs, prime among them is the idea that you will have to sacrifice a good proportion of your belongings. Indeed, you will have to sell certain items considered valuable or ‘investments’ in order to repay your debts, but rest assured that you will be able to retain precious and sentimental items such as your engagement and wedding rings. On top of this, despite what you may have heard, you won’t lose your home. You may be asked to downsize if you have a large amount of equity in your home, but you will always have somewhere to live. Similarly, you will always have a means of transport; it serves none of your creditors to thwart your attempts to bring in a salary.
Debt is written off with an IVA
Certain advertisements have angered The Office of Fair Trading with inaccurate claims that IVAs can write off up to 90% of a debt. While this percentage is certainly inflated, it is true that after your IVA is complete, the remainder of your debt is written off. The true amount lies somewhere closer to 60%, which is more reasonable for your creditors, who will stand to regain more of their money than they would if you were to go bankrupt.
You won’t have to contact your creditors
One of the biggest draws of an IVA is the fact that once you enter into your IVA, you will no longer have to contact any of your creditors. This is done by your IP. Additionally, due to the formal and legally-binding nature of an IVA, your creditors will be unable to change any of the conditions once the IVA has been agreed to, and they will be unable to pursue any legal proceedings.
You enjoy a degree of privacy
When compared to bankruptcy, you enjoy a much higher degree of privacy with an IVA. Bankruptcies remain relatively transparent in nature and are still advertised in the London Gazette. Conversely, the only way someone will find out about your IVA is if they do a specific search for you on an online IVA register or if you authorise them to perform a credit search.
If your IVA is rejected, you have options
A rejected IVA proposal is not the end of the world. You will be provided with detailed feedback on why your IVA was not successful. As a course of action, you can address all of your creditors’ concerns and make conscious steps to improve your proposal. This will more than likely result in your IVA being accepted. If, however, it is rejected once again, you can explore other avenues, such as Debt Management Plans (DMPs).
Your credit rating will recover in time
As with any financial indiscretion, an IVA will not remain on your credit record forever. Six years from the start of your IVA, your credit rating will begin to recover and, assuming you have been making sound financial decisions, life can return to normal and you can look forward to a healthy financial standing.
About the author:
Yaakov Smith, a first class honours graduate of Oxford University, has almost twenty years’ experience developing and designing software. He is the CEO of Logican Solutions, a UK-based business management software company that serves to streamline processes and increase productivity. They offer a range of products, including solutions for claims management, debt management and property portfolio management.