If you’re considering an IVA as a possible debt solution in your journey to being financially free, you might be wondering what an IVA is, how it works and if an IVA is right for you. The experts at Debt Movement answer all your IVA-related questions in this post.
An IVA, which stands for an Individual Voluntary Arrangement, is a legally binding agreement between you and your creditors. It is used to help you pay back your debts over time. IVAs usually last for five years but can be extended for an additional 12 months if you have equity in your property or at your creditors.
An IVA may be right for you if you are struggling to pay your debts. The IVA will allow you to make affordable monthly payments over several years. At the end of the period, any remaining unsecured debt included in the IVA is written off.
1. How Badly Does an IVA Affect Your Credit Rating?
Due to the nature of IVAs, they will affect your credit rating because an IVA will be logged on your credit file. The details of the IVA are kept on the Individual Insolvency Register, which is a public record, and they will remain there for the duration of your IVA. However, three months after ending your IVA, these details will be removed.
Having an IVA may make getting credit more difficult, especially in the short term. You may still be able to get some personal or business loans, but you will likely be charged higher interest rates. In addition to this, if you would like to take out credit of £500 or more, you must get written permission from your Insolvency Practitioner.
The important point is that the dip in your credit rating received from having an IVA is not permanent. As long as you keep up with the payments, your credit score will gradually increase.
2. Can I Lose My Home if I Get an IVA?
If you own your own home, its value will be considered as an asset of your IVA. This means that, in the final year of your IVA, you will need to get a valuation of your home to show how much equity you have. If your equity is greater than £5,000, you will normally have to remortgage your home to release the equity and put it into your IVA. However, you would not need to sell your home to do this.
Generally, most IVAs have a limit on how much you are expected to raise through remortgaging. This limit depends on the property value and the current amount of your mortgage. Where you are unable to remortgage and you do have equity in your property, you may need to extend your payments for a further 12 months.
3. Will My Bank Account Be Checked if I Get an IVA?
In an IVA, you agree to pay what you can afford each month to your creditors. Depending on your disposable income, this monthly figure may change following a review of your circumstances, which will take place each year.
Your IVA Supervisor may ask to see your bank statements or payslips so that they can assess what your monthly payment should be. This may feel intrusive, but it is a helpful part of an IVA, allowing you and your IVA provider to tailor the monthly payments to your financial situation.
4. What Are the Disadvantages of an IVA?
Even though an IVA can be effective at helping you regain control of your finances, there are some disadvantages that you need to consider:
- Your credit rating will be negatively affected. Your credit rating drop will last for the duration of your IVA and possibly for up to one year after.
- If the IVA fails, lenders may backdate the interest owed on your debts, or they may petition for your bankruptcy.
- Not all debts can be included in an IVA, for example, court fines.
- If you come into extra money, such as an inheritance or any other such windfall, you may need to pay all or part of it into your IVA.
- Any high-value assets, such as valuable cars or watches, may need to be downgraded, with the remainder of the proceeds going into the IVA.
5. Can I Go on Holiday if I Have an IVA?
Yes, there is nothing within an IVA to stop you from travelling. You can travel both within the UK and abroad. However, what may prevent you from going on holiday is the amount it may cost. Due to being in an IVA, it is unlikely you will have adequate cash available for an expensive holiday.
However, one way around this is by working some extra hours each month. You will need to pay a portion of any additional income earned into your IVA but you can retain some of it. This will mean you continue to meet your monthly IVA requirements and can set aside some savings each month for a holiday.
6. How Much Are You Left to Live on with an IVA?
Your IVA payments are based on what you have left after taking into account your income and reasonable living expenses.
As an example, if you earn £2,000 and your monthly living costs are £1,750, then your IVA payment will be £250. All IVA firms use industry recognised allowances for household budgets, which consider food, clothing, travel, etc. These allowances help to identify your monthly living budget, making sure all your necessary expenses are covered.
7. What if I Earn a Bonus or Receive Overtime Pay?
The general rule about wages and IVAs is that you are allowed to earn up to 10% more than your usual take-home pay. You will be allowed to keep all of this money. But if your monthly earnings are greater than this, then you will need to notify your Supervisor. For any earnings you make that surpass the 10% threshold, 50% will need to be paid into your IVA.
8. How Often Are IVAs Refused?
IVAs are sometimes refused for several reasons. Firstly, to get an IVA approved, 75% of your voting creditors (by value) need to agree to the terms of the IVA. As long as 25% (by value) or less of your voting creditors reject the IVA, you will still be able to go ahead with the IVA. Not all creditors will vote in the IVA decision process.
9. Can I Get Car Finance if I Have an IVA?
Having an IVA can make getting credit more difficult, but it does not prevent your ability to access finance and loans. Whether it is car finance or any other type of finance, the key factor in determining whether you will be able to get the loan is affordability.
The finance firm will assess your circumstances — looking at your income and expenses — and decide whether or not the loan you are applying for will overburden your financial situation. If they decide to go ahead with your application, the IVA may mean you end up paying a higher interest rate. Your Supervisor will have to confirm that they are happy for you to obtain the car finance.
10. Does an IVA Affect My Partner?
Being in an IVA is a long term commitment and your household income and expenditure will be taken into account.
A note will be placed on your credit file, but not your partner’s. If there are any joint debts that you hold with your partner, they will still be liable for them even though you have entered into an IVA, so it’s important that you consider the payments that will need to be made to these debts by your partner outside of the IVA.
Where you have a property that is jointly owned, only your share of the equity will be taken into account, not your partners.