IVA Pros and Cons
The following list of Pros an Cons of an IVA will help you to see clearly the advantages and disadvantages that surround the IVA solution. Understanding how an IVA will benefit you as an applicant is, obviously, a pretty important part of the IVA process, but arguable not as important as understanding how the IVA Cons, or downsides of an IVA will impact on you.
So, to help you in this process, we've listed the headline IVA pros and cons below. Take time to read each one carefully and make sure you appreciate the potential impact that any of these points might have when applied to your personal circumstances.
If you prefer you could call an adviser on 0800 088 7502 and they'll explain the full IVA pros and con to you over the phone.
- Protects assets. An IVA allows the applicant to safeguard assets, such equity as their home, which might otherwise be vulnerable in bankruptcy.
- Protects income. An IVA provides professionals, such as police officers, armed service personnel, lawyers and accountants, to whom bankruptcy is a prohibited solution, the chance to deal with serious debt problem in a formal manner whilst avoiding bankruptcy .
- Prioritises secured loans. An IVA allows secured loans, such as home loans or HP agreements, to continue be paid in full each month as part of your IVA budget. This protects the asset the loan is secured against from missed payments and, ultimately ,repossession.
- Fixed Term. An IVA has a fixed term and, so long as you successfully complete the IVA, you know you will be completely debt free at a specific date in the future which is normally 5 years. And, even though you may not have managed to repay all your debts, any remaining or outstanding debt is written-off by the IVA.
- Affordable payments. Your IVA payments will be based on what you can actually afford, rather than what your original payments were. This figure is calculated before you enter into the IVA, giving you the opportunity to confirm that you are happy with the amount you will be expected to pay.
- Freeze on Interest. Under the standard terms of your IVA, your creditors will be legally obliged to put a freeze on further interest being added to you debt. Once the IVA begins, the debts stop increasing.
- Block on legal action. Because an IVA is a 'formal' agreement, once it has been accepted by the necessary majority of creditors, no further enforcement action can be entered into for the duration of the agreement. This stops any legal action from being taken, including visits from the bailiffs.
- Stops late payment charges. Once the IVA has been agreed by the necessary majority of creditors, the standard terms of the IVA stops any creditor from trying to increase the debt you owe with late payment charges. Once the IVA begins, the debts stop increasing.
- Legally binding agreement. An IVA is a legally binding arrangement and, once the IVA has been agreed by the necessary majority of creditors, all the creditors are legally bound by its terms. This even includes those creditors that may have voted against the IVA.
- Private agreement. Unlike bankruptcy, an IVA is not advertised in the press and, because of this, an IVA is often referred to as a private agreement.
- Blocks creditor contact. Once the IVA has been accepted by the necessary majority of creditors, they forfeit the right to contact you directly to discuss the progress of your IVA. All correspondence is channeled through the Insolvency Practice acting as your IVA supervisor.
Damages your credit rating. An IVA will damage you ability to obtain credit for 6 years from the beginning of your IVA. This means that under the terms of the IVA will preclude gaining credit, so that's the first 5 years, and then, for a further 1 year after the IVA has completed, obtaining credit will be allowed but will be extremely difficult, or expensive. But, once the 6 years has elapse, you will be able to rebuild your credit rating as normal.
- Restricted banking facilities. Due to the damage an IVA has on your credit rating you will not be able to hold a typical current bank account. Instead you will need to use a 'basic bank account'. Basic bank accounts are similar to current accounts, but have no form of borrowing attached to them. No overdrafts, no cheque books, or credit cards. They do, however, come with pretty much everything else, including online banking, Direct Debit and Standing Order facilities and a Debit card.
- Only deals with unsecured debts. An IVA will only deal with unsecured debts. If you are struggling to afford your secured debts, such as a mortgage or secured loan, an IVA will not directly be able to help you. It will, however, allow you to prioritise your secured debts and reduce the cost of your unsecured debts.
- Legally binding agreement. An IVA is a legally binding document, which cannot be easily amended without agreement from both sides. Whilst there are some safeguards in place to assist with temporary changes in circumstances, if you are unable to maintain the agreement over the long term your IVA will be vulnerable to failure.
- No right to cancel. Once an IVA has been accepted by the necessary majority of creditors at the creditors meeting, the IVA begins. It cannot simply be cancelled after this point. There is a formal process that would have to be undertaken in order to fail the IVA and bring it to a close. So be sure you wish to proceed before you formally commit yourself.
- Budget limitations. Creditors will want to ensure you are living within your budget and not falling further behind with your financial commitments. Certain areas of your IVA budget might be less generous that you would prefer, with some cost such as smoking, not given any allowance at all.
- Annual reviews. Creditors will want to ensure that you are maintaining the agreement as set out in your proposal. Therefore you will be subjected to annual reviews and each year and you will be assessed as to whether your IVA payments can increase.
- Windfall clause. Every IVA will have a windfall clause. This clause deals with situations where unexpected money is either gifted of received, such as a lottery win or inheritance. Under the terms of this clause, you will be expected to declare the windfall and make all of it available for the benefit of your creditors. There are some exceptions, such as redundancy payouts or critical illness policies, where it could be agreed that an element of the payment be kept, but this would be at the discretion of the Insolvency Practitioner.