What is the impact to an individual of an IVA?

An Individual voluntary arrangement (IVA) is a debt and insolvency solution that involves a reduced payment plan over a longer time (click here for the full definition of an IVA from the Citizens Advice website).

IVA’s can be beneficial in situations where the debt is straining your finances, but it can also have fairly dire consequences on various aspects of your life. This article covers some of the effects of applying for an IVA.

An IVA can lower your credit rating

Your credit rating is an estimate of your ability to fulfil your financial commitment, based on your previous credit and loan repayment behaviour. Financial institutions such as banks look at your credit rating every time you apply for a loan or credit, and it helps them determine your creditworthiness.

When you fail to repay a loan on time, your credit rating gets lower and vice versa. An IVA will lower your credit rating because, by the time you are taking one, it means that you have been struggling to make your payments and have probably missed a few payments. In the eyes of financial institutions, you are not reliable, and it is hard for them to trust you.

Your credit rating can be affected for six years starting from the date of the agreement. Your name is also listed in the individual insolvency register [IIR], which can be viewed by the general public, making it harder for you to borrow money from friends and colleagues. During the period when the IVA is active, you can only borrow a maximum of 500 pounds.

It may affect your job

If you work in finance, law, accountancy, or property, your job might be affected if you enter into an IVA. As an accountant, it might be hard to convince your employer that you can manage other people’s finances when you cannot manage your own. This is, however, different in every company.

If you are not sure, you can always refer back to your employment contract. Speak to your professional membership body, trade union, or HR department to plead your case. To be on the safe side, talk to your employer first before applying for an IVA.

Your assets are safe

Assets are seldom included in your IVA. By assets, we mean anything that holds significant value such as savings, a car, shares, jewellery, a house, etc. The decision on whether to sell these items or not is left up to you.

You may be asked to sell your car

Rarely are people asked to sell their vehicles. However, your insolvency practitioner will check the value of your car before deciding on whether or not you have to sell it.

If you drive a high-end car worth thousands of pounds, then your creditor might ask you to sell it. In case you are instructed to sell your car, your creditor takes part of the money, and you are given the rest to buy a more affordable car. If you own more than one car, then you really have to convince your IP on why you need the extra vehicle. Otherwise, it will almost certainly be required to be sold.

If you have a car on hire purchase, not to worry; you can continue paying for it as long as the company is okay with you being in an IVA. However, once you stop paying for the car, all the extra money will go towards paying off your debt.

You may need to remortgage your house

If your home equity is high, you might be asked to release it in order to repay the rest of the loan. Your home equity is the difference between your home’s current market value and the amount of money you presently owe on it.

In the last six months of your IVA, your insolvency practitioner may evaluate your home equity and determine if it is enough to pay off the remaining debt. If it is, your house may be remortgaged to release that equity, but if it is not, you will continue making payments for an additional 12 months, making it six years instead of five.

If your home equity is enough to repay all of your debt, then you will not qualify for an IVA. In this case, you will have to remortgage your house or find an alternative source of money to pay back the loan.

You will have to stick to a budget

When on an IVA, any extra money that is left after spending on your living expenses will go to your creditor. A budget will ensure that you are in a position to make your monthly payments and afford all your basic needs. You might need to cut down on a few luxuries, but you should still be able to provide for your family without significant struggle.

An IVA is not all bad. It allows you to clear all your debt and slowly rebuild your credit rating. It will also teach you how to manage your finances in the future much better.