If you’ve been considering getting an IVA, you likely have a number of questions running around in your head. If you’ve come this far, you probably know what an IVA is and how it works, but what you may not know is, how will it affect your life?
There’s more to an IVA than just the relief of only having to make one payment each month to cover all your debts – this decision will affect your credit score and spending for the next 5 or 6 years, so you will need to be sure you know what these effects will be.
What Is an IVA?
To recap, an Individual Voluntary Arrangement is a legally binding agreement between you and your creditors that allows you to repay a specified percentage of your debts, rather than the entire amount. The repayments will be structured into affordable monthly contributions for a period of 5 or 6 years, or an agreed-upon lump sum.
How am I Protected?
Once your IVA has been approved, you will receive no more interest on your debts, and your creditors may not take any further action against you or even contact you regarding repayment of your debt, as long as you keep paying your monthly instalments. You will be protected from legal action, including County Court Judgements (CCJs) and Charging Orders, and all your assets will be protected.
How Will It Affect Me?
There are a number of advantages and disadvantages to getting an IVA, so it is a good idea to think carefully, and educate yourself properly, before putting forward a proposal to your creditors.
Credit Score and Further Credit
Before your IVA is approved, your creditors will register a default on your credit file that will last for 6 years, even if your IVA is only 5 years, or you pay it off early. This will affect your credit rating until the default is removed.
You will not be able to take out any further credit without permission from your Insolvency Practitioner (IP), and even if you get permission, and do manage to get credit, the interest rates may be high due to your default status. We highly recommend not attempting to take out any further credit during the course of your IVA.
You will not be allowed to have a bank account with an overdraft, and if you have any other debts with your bank, your account is likely to be frozen – we would recommend that you open a new bank account, and switch all of your direct debits to your new account before putting forward an IVA proposal to your creditors. Your IVA will not affect your ability to open a new bank account.
Earnings and Windfalls
When your income and expenditure is reviewed at the outset of your IVA proposal, every penny will be taken into account. This means that every penny of your monthly earnings will be accounted for, and you will not be able to spend anything on luxury or unnecessary items.
Should your salary increase during the course of your IVA, anything over a 10% increase (this is the standard, your individual proposal may differ) must be reported to your Supervisor, and the agreed-upon portion (usually 50% of anything over the 10% increase) must be paid into your IVA.
Any windfalls you receive whilst you are in your IVA, whether they be from winning the lottery or an inheritance, must be reported, and you may be required to pay some, or all, of it into the IVA.
Spending Restrictions
The spending restrictions put in place when you apply for an IVA are there to ensure that a fair balance is made between you and your creditors, so that you can confidently move towards your goal of reaching financial freedom.
Your budget will be restricted to the necessities of life, and each year your spending will be reviewed to ensure that your contributions remain realistic and affordable. Should you have a change in circumstances, for better or worse, you should immediately report it to your Supervisor so that your IVA can be reviewed, and adjusted if necessary.
Should you exceed your budget and find yourself unable to keep up with your IVA payments, your Supervisor will complete a review, and will likely ask for copies of your bank statements to evidence your outgoings.
In Case of Emergencies…
When you create your budget, it is always worthwhile to allocate some funds for emergencies, but it will be up to you to put this away each month. If you do find yourself in an emergency situation without enough money saved up, and it is likely to affect your IVA payments, report the situation to your Supervisor immediately so that the problem can be remedied, possibly by a payment reduction or payment holiday, which means that you can miss a month (or more, depending on your requirements), and the payments will be added to the end of your IVA.
Is My Home at Risk?
Although your home will not be at risk when you apply for an IVA, its value will be considered an asset. In the final year of your IVA, you will need to get your home valued to report your equity. If your equity is over £5,000, you will most likely have to remortgage your home, and put the resulting equity into your IVA – or if you are unable to remortgage, you may be asked to make a further 12 payments into your IVA. This will all be explained to you before you put forward your IVA proposal to creditors.
How to Ensure IVA Success
To ensure your IVA is successful, there are a number of simple actions you can take. IVA success does not simply refer to signing the agreement and making monthly payments – it includes learning from the experience, and using your newfound knowledge to avoid making the same mistakes again.
- Communication – stay in touch with your IP, and ensure that you report any changes in income, windfalls, or emergencies that may affect your payments.
- Budgeting – learn to budget like a pro. Use a budgeting app or make an Excel table, and record everything! Making budgeting a part of your daily routine will stand you in good stead for a debt free future.
- Reflect – take a good look at your old spending habits, and recognize where you went wrong. You will have 5 to 6 years of restricted spending to consider this and learn how not to do it again.
- Learn to save – once your IVA is over, rather than increasing your spending habits to absorb that extra cash, try putting the equivalent of your IVA monthly payment away into a savings account for a rainy day, an overseas trip, or something you’ve always wanted.
What if My IVA Fails?
Should you fail to keep up with your IVA payments, and your IVA fails, you will be back in the same position as you were before your IVA was approved. Creditors will be free to add on interest and charges, and will once again be free to contact you, demand payment, and take any legal action they feel is necessary – these include County Court Judgements (CCJ), Charging Orders, or petitioning for your bankruptcy.
Returning to Normal Life
After your IVA is complete, life will not immediately go back to “normal”, and in fact, we hope it doesn’t at all. Keep what you have learned, and try to live a new and improved life of financial freedom and wellbeing.
How to Repair My Credit Score
Getting your credit score up again is a time consuming project that will take patience and dedication. Here are some ways to start increasing your credit rating:
- Check your contact details on the electoral roll, and update your address.
- Open a new bank account and ensure you manage your money well.
- Open a utility account in your name, and make your payments on time.
- Get a Credit Builder Card and pay it off perfectly.
All these things will create a new image of you, in the eyes of potential lenders, as a stable and responsible borrower.
Save Money
Every time you receive your salary or wages, put away a predetermined amount. Set up a direct debit so that you don’t even have to think about it, and you won’t even notice the money is gone. Soon you will have a nice lump sum put away, and you will be able to afford that dream holiday, or simply not have to worry about emergencies.
We know how terrifying it can be to commit to a long term debt repayment plan that will inhibit your spending and freedom, but in many cases, an IVA can be the best way to reset your life and reach financial freedom. Reach out to the non-judgemental team at Debt Movement for impartial debt guidance and solutions.
