The consequences of an IVA
Each person entering an IVA should explore the consequences of an IVA beforehand, to ensure they understand the potential impact that an IVA may have upon their personal circumstances.
It's fair to say that the suitability of each IVA case will judged on how the consequences affect the applicant's life style and assets. Sometime the consequences will have a positive effect, other times, a negative effect.
So what are the consequences of an IVA.
Positive IVA Consequences
The potential positive consequences of entering into an IVA are well documented.
- One single payment :
Your IVA will consolidate all your unsecured debts into a single monthly payment that is based on affordability. This new IVA payment replaces all existing debt repayments.
- Predetermined duration :
Your IVA will have a predetermined duration, which is normally set to 60 months. Once you've completed this agreed term, your IVA completes and you're debt free.
- Potential debt forgiveness :
Any debt that hasn't been repaid at the end of your IVA is legally written off by your creditors, leaving you completely debt free after the successful completion of your IVA.
- Guaranteed legal protection :
Once your IVA has been accepted at the Creditors' Meeting, all your creditors must refrain from taking legal action against you for the recovery of your debt.
- Guarantees to freeze interest :
Your creditors will be legally obliged to stop charging interest on the outstanding balances of your debts. This has the effect on ensuring your debt becomes crystallised and is no longer increasing.
- Protects your assets :
An IVA protects your assets from aggressive creditor action. Your creditors cannot make you sell your home whilst your IVA is active, even if it holds equity.
- Discreet solution :
Unlike bankruptcy, an IVA isn't published in the London Gazette and your Tax Code isn't affected. This allows you to keep a degree of privacy not afforded through the bankruptcy process.
- Total solution :
Entering into an IVA will put you on a course for debt freedom and, once you have completed your IVA successfully you will be free of your unsecured debts, even though you may not have repaid your original debt.
- Protects your income :
An IVA acts as a formal alternative to the bankruptcy process. As a result, those people whose profession prohibit bankruptcy as a debt solution can opt for the IVA without fear of suffering professional sanctions.
- No stigma :
Unlike the bankruptcy option, there is no stigma associated with an IVA. You have the satisfaction of repaying what you can afford, whilst having the assurance that whatever doesn't get repaid is legally written-off.
These positive aspects of an IVA outline how an IVA can enable someone to regain control of their financial circumstances, whilst being protected from their creditors.
Being able to regain financial control will, for most people, represent the most important consequence of an IVA, as having control over your finances removes the threat of bankruptcy.
Negative IVA Consequences
Each IVA will have its potential downsides, depending on the surrounding circumstances and, because all IVAs are unique, the relevance of the downside will vary from case to case.
In general terms these are the potential negative consequences for entering an IVA.
- Credit Rating Damage :
Most people understand that reaching any agreement to reduce payments to their creditors is likely to have an impact on their credit rating, and entering into an IVA is no different. The IVA will be marked on the applicant's credit file and reference to the IVA will remain on their credit file for a total of 6 years.
- Legally Binding :
The IVA is a legally binding agreement. This is often seen as a benefit in most circumstances, because the creditors are legally bound by the IVA and can't simply change the terms of the arrangement. However, being legally bound to the IVA restricts the applicant too. The legal obligations that come with the IVA can be tough, for example having to share windfall payments with creditors.
- Scrutiny :
The IVA is an agreement that requires supervision. The supervision is provided on behalf of the creditors by an Insolvency Practitioner and, as part of the IVA supervisory process, the applicant will need to provide access to all their financial affairs. Failure to comply could result in the IVA being rejected or being terminated.
- Lack of Flexibility :
The creditors will expect the applicant to maintain their contributions as agreed at the Creditors' Meeting. If there's a change in circumstances the IP has the discretion to reduce payments by up to 15%, but any reduction larger than this would require a variation meeting to be called. Substantial modifications to the IVA payments are not agreed to without good reason, so shouldn't be expected.
- Time Period :
Whilst an IVA can sometimes consist of just a single 'lump sum' payment, in the vast majority of cases an IVA will last for 5 years or longer. Much can change over a 5 year period and if you cast your mind back over the last 5 years you'll no doubt agree. It's not unreasonable to imagine someone meeting a new partner, becoming engaged, then marrying and starting a family all within 5 years, in fact, most people do. So make sure you have the stamina to complete the IVA successfully.
- Budgeting :
The IVA payment should always be affordable. However, your IVA payment will be set according to your budget at the time you enter the IVA. Be prepared to live within that IVA budget, and be prepared to accept the inevitable sacrifices needed during your IVA.
These are just some of the general consequences of an IVA.
Professional IVA Advice
If you would like to have a chat with an adviser regarding any of the IVA consequences listed above, just give us a call. We operate a No IVA = No Fee policy and all our IVA consultations are free, confidential and without obligation.
To arrange a consultation call 0800 088 7503 or simply complete this form and one of our adviser will call you at your preferred time.