Many debt solutions, though they can help you get out of debt, can have a negative impact on your credit rating. Of course, if you’re in the kind of situation where you really need to enter a debt solution, there’s a good chance your credit rating will already have been affected – and could get worse if you try to carry on without getting some kind of debt help.
Here we’ll look at what an IVA (Individual Voluntary Arrangement) is and how it could affect your credit rating.
What is an IVA?
An IVA (Individual Voluntary Arrangement) is a legally binding form of insolvency designed to help people in serious debt problems – without them having to enter into bankruptcy.
If you have a significant amount of unsecured debt and you can’t afford your monthly repayments as agreed, entering into an IVA could allow you to start making reduced payments every month – getting out of debt while avoiding some of the financial and personal consequences that can come with being made bankrupt.
How does an IVA work?
If an IVA is considered the best approach for getting back on top of your debts, and it is agreed with your lenders, you’ll start making affordable monthly payments into your IVA – based on what you can afford after all your essential living costs (such as food & utility bills) and secured debts (mortgage & secured loans) have been accounted for.
The IVA will last for an agreed amount of time (usually 5 years), and on successful completion, your lenders will write off any remaining debt you have included in your IVA.
How could I set up an IVA?
An IVA can only be set up by a qualified Insolvency Practitioner (IP). An IP is usually an accountant or solicitor, and is authorised to act in legal insolvency cases. They will take responsibility for presenting your IVA to your unsecured lenders, and act as the ‘middle man’ representing both your interests and your lenders’.
If an IVA is considered the best approach to repaying your debts, you’ll give your IP specific details about your financial situation so they can then draw up an ‘IVA proposal’ on your behalf. This is a document that states how much you could afford to pay towards your IVA on a monthly basis (after your essential living costs have been covered).
The proposal will then be sent to your unsecured lenders who will vote to decide whether to accept your IVA (or make any changes to it, or reject it). If lenders who ‘own’ 75% or more of the total debt value agree to accept the IVA, it will go ahead.
Click here to apply for an IVA.
What are the pros and cons of an IVA?
There are several benefits and disadvantages of entering an IVA that you should consider when deciding if it could be the most suitable solution for your circumstances.
On the ‘upside’, an IVA could allow you to:
* Know exactly when you’ll be debt-free (usually after 5 years)
* Avoid any further legal action from your lenders
* Protect your career from any statutory restrictions (which can
be the case with bankruptcy).
However, on the ‘downside’, entering into an IVA also means:
* You may have to release equity in your home (in the 54th month)
* You can’t take out any additional credit while your IVA is
running
* You’ll have to commit to making regular payments for the full
term.
Would an IVA affect my credit rating?
Assuming your IVA runs for the usual five-year period, it will show up on your credit rating for a year afterwards – which may affect your ability to get credit during this time.
