If you find yourself struggling with debt, the prospect of a financial lifeline in the form of an Individual Voluntary Arrangement (IVA) may feel like light at the end of a very dark tunnel. However, an IVA is not a magic bullet. While they are designed to help those in crippling debt tackle their repayments in manageable bitesize chunks, they of course come with a number of conditions and limitations that can impact your lifestyle. 

To help you decide if an IVA is the best option for you, it’s important to consider all of the pros and cons that come with this debt management solution. To make sure you make the most informed decision possible, in this guide we take a look at the key advantages and disadvantages of IVAs.

What are the advantages of Individual Voluntary Arrangements?

When facing overwhelming debt, IVAs can provide both much-needed financial respite in the short-term and a way out of debt in the long-term. Below we explore the positive aspects of IVAs and highlight their main advantages when it comes to regaining control of your personal finances.

Some of your debts may be written off 

Unlike with Bankruptcy, an IVA will not see all of your debt written off. However, a percentage of it can be if you stick to the terms of your agreement. IVAs typically come with a five or six-year fixed-term – this means, once you complete this term and meet all your obligations, any remaining debt is typically written off. This can suit both you and your creditors – your creditors receive more of their money back than they would if you declare Bankruptcy, while you’re provided with an incentive to stick to your repayment plan in the shape of a debt-free future. 

Protection from creditors

Regardless of the type of debt you’re in, one of the most stressful aspects of owing money can be the seemingly endless chasing from creditors. This can be especially traumatic if you’ve reached a stage of debt in which you’re being visited by debt collectors and/or bailiffs. 

Fortunately, when you enter into an IVA, your creditors are legally bound to stop pursuing legal action against you. This means an end to the constant correspondence, phone calls, texts, emails and legal threats you may have been receiving. This level of protection and respite allows you to focus on paying off your debt in a more proactive way, without feeling as though you have creditors breathing down your neck at all times. 

Many personal assets can be protected 

One of the main reasons people struggling with debt typically delay seeking professional help is the fear they will lose their home or other important personal assets like their car. However, unlike other debt solutions like Bankruptcy, IVAs don’t require you to sell your assets in order to make repayments.

This means your home and vehicle can be protected while you’re still addressing your debt issues. That being said, it’s worth noting that you could be expected to remortgage your property to free up some equity, or sell your car if it’s worth a certain value, in order to service your debts with unsecured creditors.  

Interest on your debts will be frozen 

Once you’re in an IVA, your creditors will typically freeze interest and other additional charges on your debts. Naturally, over the course of your IVA fixed term, this can result in significant savings as more of your payments go toward reducing the principal debt rather than simply servicing interest. 

Ongoing support is provided

Provided you opt for a reputable IVA service provider – such as MoneyPlus Insolvency – advice and support will be available throughout your agreement period. This means you’ll always have an expert to discuss any concerns you may have with.

What are the disadvantages of Individual Voluntary Arrangements?

While it’s true that IVAs can provide a viable solution for managing debt, they aren’t suitable for everyone. Remember, there’s no one-size-fits-all solution when it comes to debt management. For this reason, before committing to an IVA, it’s important to listen to the advice of experts and consider the potential drawbacks IVAs can pose. If an IVA is not appropriate for your situation, you still have other options, including debt management plans and debt relief orders. With this in mind, it’s important to pay attention to the potential disadvantages of IVAs listed below. 

Your credit score will be impacted 

While an IVA can certainly help you become debt-free, this does come at a cost. One of the biggest downsides to an IVA is the fact that your credit score will take a significant hit the moment you enter into your agreement. The information indicating you’ve been in an IVA will also stay on your report for six years.

If your account wasn’t previously in default, a default will be added and will remain on your credit record for six years. Obviously, this can make accessing credit during this time more difficult. This means credit card, loan and mortgage applications are more likely to be turned down during this period. It’s also important to bear in mind that if you want to borrow any more than £500 during your IVA, you’ll need to get approval from your Insolvency Practitioner.

IVAs can’t be used to tackle all types of debt

While it’s true that IVAs can help you write off significant amounts of debt after six years, not all types of debt are included. IVAs are suitable for unsecured debts only. These are debts that don’t have major assets, such as properties, attached to them – for example credit card debt. So, if the debts you’re struggling with are secured (such as mortgages or car loans), these can’t be included in an IVA.

This would mean you would need to continue to make these repayments separately. Indeed, as mentioned above, if you have equity in your property, you could be asked to remortgage and release equity to pay off debts as part of an IVA.

You’ll have to stick to a tight budget

IVAs are legally binding arrangements. When you enter into one, you have to stick to its terms. While this might sound easy on paper, the reality can be quite different. Your monthly payments, which are designed to be manageable and realistic, may mean you have to manage on a relatively tight budget throughout the debt repayment period. This could mean a drastic change to your lifestyle. And remember – a failed IVA could lead to you being made bankrupt.

Your name will appear on a public register

IVAs aren’t private. When you enter into an IVA, a record of this will appear on the public Individual Insolvency Register. Naturally, this means anyone can access this information, including family, friends, future creditors and employers. Those looking to protect their personal and professional reputation should think about this before entering into an IVA.

Creditors don’t have to agree to your IVA

Although most proposed IVAs involving unsecured debts are accepted, your creditors aren’t obliged to agree. This means even if an IVA is your preferred option, unless 75% of your creditors agree to it, you can’t enter into one. 

Windfalls can impact your repayment plan

Although IVAs operate over a fixed period of time, this doesn’t necessarily mean your repayments will stay fixed during this period. If, for example, you come into a significant windfall, you may be required to use it to pay off your IVA early or your repayments may increase. This applies to an inheritance, a significant increase in salary, and lottery winnings, for instance. While this is, of course, a positive development in terms of clearing your debt, it might not be how you envisioned using such funds.

Are you struggling with debt repayment?

If you’re still unsure of which debt solution is best for you having read our pros and cons of IVA, don’t hesitate to contact us. We will take the time to listen and understand your financial situation and offer guidance on how to regain control of your debt. Connect with one of our specialists today.