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.

Six ways to try and cut your spending

Have you ever looked at your bank account and been concerned about your “available” balance? Most of us have at some point, according to a recent survey carried out by our friends over at same day loan broker Growing Power. Cutting your spending can feel like a mammoth task that many of us would rather avoid than take responsibility and follow steps to improve our finances.

However, with a little bit of time and effort, cutting your spending can become instinct and your bank balance can start to look healthier. Even if your income isn’t great, there are ways that you can improve the way that you spend and make positive changes to your habits.

1. Destroy your credit cards

Credit cards can be a lifeline for many people and there are times where you’ll need to use them. However, many of us are guilty of having too many credit cards and generating unnecessary debt. If you have several cards, consider destroying all of them but one.

Although you may still have balances to pay off on these cards, you’ll be able to access your account and make payments towards your balance online. Cutting up your cards will avoid the temptation to use them unnecessarily and it doesn’t mean you’ll never be able to use them again.

If you feel at any point that you need those credit cards again, you can request a new card. Living within your means will allow you to have a better relationship with money and set up positive future spending habits. Stick to using your current account as much as possible and steer away from overdrafts and credit cards.

2. Transfer balances

As overdraft and interest charges are increasing in the UK, it can be a good idea to transfer any balances that you have on credit cards where possible. Banks are now competing to get customers to move their balances to them and offering good deals for doing so.

You may be paying a fair amount of interest each month on a credit card, and if you’re paying the minimum payment then it’s unlikely that you’re decreasing the balance of the card that significantly. Transferring your balance to a bank that offers 0% on balance transfers for a set period can mean that you’ll pay the same amount that you’re currently paying each month towards your balance but you’ll decrease it substantially more.

Shop around for banks that are offering balance transfer deals, although you may not be able to find a 0% deal, you may be able to find one that allows you to pay less interest than you are currently.

3. Delay purchases

In this modern age where targeted adverts are constantly following us around online and shops are getting increasingly better at visual merchandising, it can be tough to avoid impulse buying. Retailers know exactly what to do to entice us and make us spend our hard-earned cash, so always try to stay one step ahead.

The next time that you are about to make a purchase, think about whether or not it’s really necessary. If you think that it is necessary, still give yourself 24 hours before committing to the purchase, especially if it’s fairly costly.

Not only will this allow you to shop around for a better deal, but it’ll also give you time to think whether the purchase is necessary or whether you’ve fallen victim to a strong advertising campaign.

4. Get the best price

If you’ve waited 24 hours to buy something and still think it’s necessary then go ahead and make that purchase, but make sure you’re getting the best deal.

With so many retailers online now, prices can vary greatly. Never settle for the first price that you find, look around and compare different retailers before committing to one. This also means looking online for discount codes and coupons that may apply to your purchase and knock a fair chunk off the price. One good tool for this is Invisible Hand. This is a Chrome Extension that will automatically search for a better price from multiple retailers when you are about to buy, ensuring you can source the best deal without trawling through Google and multiple websites.

5. Use lists

If you’re about to go shopping, whether you’re online, in the supermarket or on the high street, make a list. It’s very easy to get distracted when shopping and this can sometimes mean you’ll end up coming home with everything other than what you went shopping for in the first place.

Creating a list that you can mark off as you go can mean that you’ll be less likely to deviate from the plan and come back with what you need rather than what has caught your eye.

6. Change payment methods

If you have online accounts with any retailers, think about changing the payment method that you have on file with them. Many of us have credit cards or debit cards with overdrafts set as our default payment method with many online retailers.

Removing these cards and only having one card on the account that is linked to your current account can avoid getting yourself into any further debt unnecessarily.