How Can I Use IVA to Manage My Debt: Unveiling the Pros and Cons

Are you feeling overwhelmed by mounting debts, unsure of where to turn for relief? If so, you’re not alone. Managing debt can feel like navigating a maze, with numerous options and considerations to weigh. One potential solution that often surfaces in discussions about debt management is an Individual Voluntary Arrangement or IVA. 

But what exactly is an IVA, and how can it help you regain control of your finances? In this article, we’ll delve into the pros and cons of using an IVA to manage your debt, providing you with the insights you need to make an informed decision about your financial future. 

Whether you’re considering this option or simply curious about your debt management choices, read on to uncover the details behind the IVA solution.

So, without wasting time, let’s get started…

The Basics of An IVA

An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your creditors to repay your debts over a fixed period, usually around five to six years. It’s a legally binding arrangement that allows you to make reduced monthly payments based on what you can afford. 

Once the agreed-upon period ends, any remaining debts included in the arrangement are typically written off. IVAs are often used as an alternative to bankruptcy and can be a way to avoid more severe legal consequences while still addressing your debt obligations.

But what exactly are the pros and cons of an IVA? Are there any? Of course!

The Bright Side: Pros of an IVA

IVAs are indeed work like a saviour for many, helping them to get out of debt slowly but surely. But what exactly makes IVAs stand out? Below is a list:

1. Frozen Interest and Charges: One of the significant advantages of an IVA is that it freezes the interest and additional charges on your debts. This means that once your IVA is approved, you won’t have to worry about the amount you owe increasing due to accumulating interest or late payment charges. This can save you a considerable amount of money, especially over the typical duration of an IVA, which is around five years.
2. Affordability: Compared to other debt management options, an IVA is often relatively affordable. With an insolvency practitioner guiding the process, you can rest assured that your payments will be fair and manageable. Your insolvency practitioner will work with you to determine a monthly payment plan that aligns with your financial capabilities, ensuring that you’re not pressured into paying more than you can afford.
3. Debt Removal: Upon successful completion of the IVA, all unsecured debts included in the arrangement will be removed. This means that you’ll no longer be legally obligated to repay these debts, providing a significant relief from financial burden. Additionally, an IVA can protect you from creditors pursuing legal action, such as filing for bankruptcy or applying for court orders for payment default.
4. Legal Protection: An IVA is a legally binding agreement that both you and your creditors must adhere to. Once approved, your creditors are bound by the terms outlined in your IVA proposal. This legal protection means that creditors cannot contact you for repayments outside of the agreed-upon monthly payments, nor can they apply for County Court Judgments (CCJs) that could result in bailiffs.
5. Asset Protection: Your assets, such as your home and essential vehicles, are protected under an IVA. You won’t be required to sell them or remortgage them to fulfil your debt obligations. However, homeowners may be asked to release equity from their homes towards the end of their IVAs, although this requirement varies depending on individual circumstances.

Overall, an IVA offers several advantages, including financial relief, legal protection, and asset preservation, making it a viable option for individuals seeking to manage their debts effectively.

The Other Side: IVA Cons

Wheile IVA’s have many benefits, many people make the mistake of assuming that it does not come with any drawbacks. But even IVAs have a set of cons that you need to be aware of. So, here is a list:

1. Credit Rating Impact: One of the most significant drawbacks of an IVA is its negative impact on your credit rating. The presence of an IVA on your credit file will adversely affect your credit rating for six years from the commencement of the arrangement. Additionally, your inclusion in the Individual Insolvency Register, a public database, will further hinder your ability to secure credit during and even after the IVA period.
2. Excluded Debts: Certain types of debts cannot be included in an IVA, such as student loans, child support, court fines, and social fund loans. This limitation means that not all of your debts may qualify for inclusion in the arrangement, requiring careful consideration of your debt portfolio before pursuing an IVA.
3. Home Equity Release: Homeowners may be required to release equity from their homes towards the end of the IVA, potentially impacting their housing stability and financial security.
4. Banking Restrictions: During the IVA period, individuals are typically restricted to basic bank accounts, which do not offer features like overdrafts, credit cards, or chequebooks. This limitation can make managing day-to-day finances more challenging.
5. Creditor Acceptance: There is no guarantee that creditors will accept the terms of your IVA proposal. If creditors refuse the initial proposal, you may need to negotiate changes or consider alternative debt management options. Some creditors may not be open to the idea of an IVA at all, further complicating the process.
6. Windfall Clause: IVAs typically include a windfall clause, which requires individuals to surrender windfall sums of money, such as lottery winnings or inheritances, to their creditors. This requirement applies regardless of whether it affects your ability to make monthly payments under the IVA, potentially reducing any unexpected financial gains during the arrangement period.

While an IVA offers significant benefits in terms of debt management, it’s essential to carefully weigh these drawbacks and consider how they may impact your financial situation both during and after the arrangement. 

Consulting with a financial advisor or debt specialist can provide valuable insights and guidance in making informed decisions about debt management strategies.

So, what’s the final call? Are IVAs a good option or not? 

Do the Benefits Outweigh the Disadvantages?

Yes, the benefits of an Individual Voluntary Arrangement (IVA) seem to outweigh the disadvantages for individuals with valuable assets they wish to protect and prefer to avoid bankruptcy. 

Some key advantages highlighted include:

1. Asset protection: An IVA allows individuals to retain valuable assets while still resolving their debts, making it a favourable option for those concerned about asset loss.
2. Affordable payments: IVAs are tailored to be affordable for the debtor, ensuring that monthly payments are manageable within their financial means.
3. Creditor protection: Once an IVA is in place, creditors are legally bound by its terms and cannot pressure the debtor or take further legal action.
4. Reduced stress: By shielding debtors from direct dealings with creditors and preventing asset seizure, IVAs can significantly reduce the stress associated with debt.

However, there are also notable disadvantages to consider, such as the relatively long duration of an IVA (typically 5 years or more) and its impact on credit scores for up to 6 years after completion.

Ultimately, whether the benefits outweigh the disadvantages depends on the individual’s specific financial situation, priorities, and preferences. 

For those with valuable assets to protect and a desire for manageable monthly payments, an IVA may be a suitable solution despite its drawbacks.

Final Thoughts: Is an IVA Right for You?

When considering whether an Individual Voluntary Arrangement (IVA) is the right solution for managing your debt, carefully weigh the pros and cons outlined above.

IVAs offer significant advantages, including asset protection, affordable payments, creditor protection, and reduced stress. For individuals with valuable assets they wish to protect and a preference for avoiding bankruptcy, an IVA can be an effective debt management tool.

However, it’s essential to acknowledge the disadvantages associated with IVAs, such as their impact on credit ratings, excluded debts, potential home equity release requirements, banking restrictions, and the uncertainty of creditor acceptance.

Ultimately, the decision to pursue an IVA should be based on your specific financial situation, priorities, and preferences. Consulting with a financial advisor or debt specialist can provide valuable insights and guidance in making an informed decision about debt management strategies.

If asset protection and manageable monthly payments are your primary concerns, an IVA may be a suitable option worth considering despite its drawbacks. 

However, it’s essential to carefully assess your individual circumstances and explore alternative debt management options before making a final decision.