IVA, what does it mean
Many people are struggling with debt as a result of a change in circumstances due to the recession. Loss of a job, breakup of a long term relationship or the onset of a long term illness can all have a devastating impact on family finances. A once comfortable lifestyle can disappear in an instant so it is important to be as prepared as possible.
Debt never goes away, although it can be deferred. Therefore, debt needs to be managed and kept under control. There is nothing wrong with being in debt – most have to borrow to buy a house, for example. But where it can go wrong is where the borrowings and the repayment requirements start to exceed the income.
First step is to review family finances, with a need to be both realistic and firm.
Prioritise spend by the most essential payments that have to be made down to discretionary items. Mortgage, council tax, utilities and loan payments have to be top of the list. Essentials such as food and transport costs also need to be met. Bottom of the pile will be items such as club memberships, entertainment, holidays and cigarettes.
It may be possible to get back on track with a debt management plan. These are informal arrangements with your lenders to reduce their payments for a short period whilst you get back on your feet. This approach defers the debt – it will still have to be paid. It may involve additional fees or interest charges, but offsetting the capital payment element can give you room to manoeuvre for a short period.
If you have a number of lenders, it may be worthwhile working with a specialist debt management company to help get a plan in place. They are familiar with the workings of the debt companies and can advise you on what the options may be.
If you have more serious debt issues and one where an informal debt management plan will not get you back on track then a more formal Individual Voluntary Arrangement (IVA) may be the next appropriate course of action.
An IVA is a formal arrangement between you and your lenders. In return for an agreed monthly payment for a fixed period, usually up to 5 years, the lenders will agree to forego a portion of their loan balance. In effect, provided you keep up with the payments as agreed, you will be able to have a portion of your debt written off at the end of the IVA period and be able to start again with a clean sheet. This does not mean that an IVA is an easy option. You will have to prepare detailed family financial budgets and may have to re-mortgage your home to free up any spare equity. It is unlikely, though, that you will have your home repossessed – provided you keep up with the terms of the IVA.
An IVA must be arranged by an authorised insolvency practitioner. They will work with you to put an acceptable plan together which lenders will agree. At least 75% of your lenders (by the amount that you owe) have to agree to the plan but, if they do, then all of the lenders will be bound by the terms. Once agreed in principle, the actual IVA terms will be approved by a court. The Insolvency Practitioner will usually be the plan manager and act as a conduit between you and the lenders. You will make a single payment to them each month and they will make disbursements between the lenders – whilst retaining a fee for themselves.
An IVA enables severe debt positions to be recovered without considering bankruptcy. Whilst your credit history will be adversely affected, no public information will be available and you may not even have to tell your employer. No creditor can enforce any further action against you, impose charges or harass you for payment provided you keep to the terms of the IVA. If circumstances improve, you may want to discuss options for paying off the obligations earlier under the IVA so as to help start rebuilding your credit history.
Whilst many see an IVA as a way to write off your loans, you should be under no illusion that it is either easy or straightforward. You will have to prove your finances and show a willingness to make sacrifices. Your creditors will not easily agree to write off a chunk of what they are owed unless you show intent, openness and a willingness to sacrifice aspects of your lifestyle.
Free advice on debt management plans and the consequences of an IVA can be obtained from any office of the Citizens Advice Bureau.