Individual Voluntary Arrangements - Pros & Cons
A Debt Solution to Deal with Financial Difficulties & Serious Debts
Jan 25, 2009
Financial difficulties have become a growing issue for many families. Unsecured loans and credit card debts have been growing exponentially and need to be tackled. An Individual Voluntary Arrangement is a debt solution for resolving serious debt problems. Those with debts under £15,000 may wish to consider a debt management plan instead.
What is an IVA?
It is a legally binding debt solution for those with serious debt problems. Once 60 monthly payments have been made, any remaining debts are written off. This allows a debtor to walk away completely debt free. A further year later, the IVA won't show on personal credit reports.
Advantages of an Individual Voluntary Arrangement
- Debt write-off. An IVA can result in up to 75% of debt being written off, although this is often a lot less in practice due to overtime and a remortgage requirement.
- Legally binding. As opposed to a debt management plan, it is a legally binding agreement meaning creditors cannot contact a debtor.
- Prevents creditor harassment. It is guaranteed to prevent creditor harassment, provided the repayments are maintained over the full 60-month term.
- Protects the family home. It presents a viable alternative to personal bankruptcy as it doesn't result in the loss of the family home. However, those involved in an Individual Voluntary Arrangement will normally be expected to get a remortgage of up to 80% of the value of their home at the end of year 4.
- No negative publicity. Unlike personal bankruptcy, an IVA isn't published in the local paper. However it is published on a public insolvency register.
- The vote. Even creditors that don't vote in favour of the IVA are still bound by its terms. It is only necessary that 75% of creditors, in terms of value, vote in favour of an Individual Voluntary Arrangement.
Disadvantages of an Individual Voluntary Arrangement
- Duration. Whilst a debtor is normally discharged from personal bankruptcy after a year, an IVA has a defined term of at least 5 years. Some last for 6 years.
- Insolvency practitioner costs. An Insolvency Practitioner charges up to £6,000 for their services. There is a legal requirement that they manage the entire process.
- Cost. Whilst it costs someone £395 to declare personal bankruptcy, the cost of an IVA is far greater. There is a requirement that a debtor pays a minimum of 25 pence in the pound for any outstanding debts. This means that the bare minimum required each month to enter an agreement is usually upwards of £200 per month.
- Serious debts. It is a solution for negotiating serious debt problems, not small sums of money. Those that wish to proceed will need debts of at least £15,000 or they don't really stand to gain anything from a debt write-off.
- IVA failure. Should the agreement fail, a debtor can still be declared bankrupt, no matter how far into the agreement they are.
- Supervision by the Insolvency Practitioner. Whilst finances aren't scrutinised nearly as closely as with personal bankruptcy, it is still necessary to prove income and expenditure annually.
- Public insolvency register. All IVA's are recorded on a public insolvency register, although these aren't widely checked by the public.
When credit card debt, unsecured loans and personal overdrafts have spiraled out of control, an Individual Voluntary Arrangement provides an excellent debt solution for dealing with serious debt issues. However, those who aren't home owners, haven't been involved in speculation and aren't a professional person may be better served by proceeding with personal bankruptcy.
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