IVA - The Facts
Debt management takes on a new dimension in tough economic environments. Lenders typically harden their stance and the opportunities to earn more, either through additional hours worked or second incomes, can be limited.
Losing part or all of one household income can have a significant effect on the ability to service debt. Key is the ability to react quickly before the situation gets out of control and starts to eat away at relationships and creates a hostile environment in the home.
Start by trying to get a voluntary change of payment terms with your lenders. Explain your circumstances to them and be clear about what you are asking for. This could be a reduction in payment for a few months or a rescheduling of the debt over a longer period to reduce payments. Most will by sympathetic to your request as it is in their best interest to have you remain a paying customer.
If you cannot agree a voluntary debt management plan, you may need to consider a more formal arrangement with all your lenders. Individual Voluntary Arrangements (IVAs) are formal plans agreed with lenders where part or all the debt you owe can be written off. IVAs can be arranged yourself, but many use the services of an experienced and licenced Insolvency Practitioner to negotiate and finalise the terms of any plan with lenders. They are usually considered for debts over £15,000.
To agree an IVA, at least 75% of your lenders (by the amount owed) must agree to the plan proposed. This involves discussion and negotiation with them that can be handled effectively by those with experience of what can be achieved and that are used to such discussions. Once approved, the plan is then implemented and overseen by a manager – usually the Insolvency Practitioner that negotiated and completed the IVA on your behalf – and all lenders, not just those who voted for the plan, will be bound by its terms. The amount you will have to pay will be based on the amount of money you have left after day to day living expenses are taken into account.
An IVA affords considerable protection for the borrower. In addition to a single monthly payment (usually for 5 years) all your creditors (the people to whom you owe money) are bound by the terms of the IVA and provided you continue to make the plan payments as agreed, no further action can be taken against you. At the end of the IVA period, any remaining debt is automatically written off and you can, effectively, make a fresh financial start. If you fail to make payments in accordance with the plan, the creditors will take additional action against you which could include petitioning for your bankruptcy.
IVAs have a number of additional benefits for the lender. The details of the plan remain confidential to you and your lenders. There are no public notices (as with a bankruptcy) and you are unlikely to lose your home by having to sell it to realise cash to pay off creditors. You may have to remortgage your home to release equity, but should not be forced to leave your home. Your employer will not need to be notified of your IVA (unless you choose to tell them). Whilst your credit history may be adversely affected, it is not as severe as a bankruptcy and allows you the opportunity to repair this over time.
There are costs associated with setting up and managing an IVA. These tend to be absorbed into the monthly payment that you make and the balance disbursed between the lenders as agreed in the plan. When choosing a debt management company to work with, make sure that you are clear as to the charges they make and the services that they offer in return. The market is competitive and there are lots of alternatives so do not just take the first provider that you see and consider any personal recommendations from someone you know and trust.
Free and impartial debt management advice, including information on IVAs, is available from any branch of the Citizens Advice Bureau.
Failure to comply with the terms of the IVA may lead to you being petitioned for bankruptcy. This will probably lead to the loss of all your assets, including your home, and have a long standing adverse impact on your credit history and, possibly, job prospects in certain professions. Therefore, once you have agreed your IVA you should work hard to maintain the payments as scheduled or work with your Plan Manager to agree any variations before you default on payments.