IVA: advantages and disadvantages

An IVA is a formal and legally binding agreement with your unsecured lenders in which you`ll repay an agreed percentage of your debts (depending on how much you owe and how much you can afford) over a set period of time.

Designed to help people with unmanageable debts, IVAs are considered by some to be a preferable alternative to bankruptcy - although in some cases, bankruptcy (or another debt solution altogether) could be a better option. You`ll need to discuss your options with a debt adviser before you make a decision.

How an IVA works

On a typical IVA, you`ll make regular monthly payments for five years (although this can vary). Your monthly payments will be based on what you can afford once your essential costs (mortgage/rent, utility bills, food, etc.) have been covered, and your payments are likely to rise if your income increases during the IVA.

On successful completion of the agreed terms, your lenders will write off any outstanding debt and you will be legally debt-free (as far as your unsecured debts are concerned - an IVA can`t write off secured debts like mortgages), although your IVA will remain on your credit history until six years after the IVA started.

What are the pros and cons?

Whether or not an IVA is right for you will depend on your individual circumstances. An IVA is only suitable, in most cases, for people who cannot afford to repay their debts within a reasonable period of time, but can commit to regular payments.

But just because you`re eligible for an IVA doesn`t necessarily mean it`s the best option for you. There are a few advantages and disadvantages that anyone thinking of entering an IVA will have to consider.

Pros

• Makes your debt manageable while helping ensure that other costs can also be met.
• Avoids some of the downsides of bankruptcy.
• Interest and other charges are automatically frozen, so your debt won`t grow.
• It`s legally binding, so your lenders won`t be able to take any further action regarding the debt - as long as you stick to your side of the arrangement.

Cons

• Will significantly affect your credit rating, making further borrowing more difficult - in most cases, for the first year after the IVA finishes.
• You`ll be expected to pay as much as you can, so you`ll have very little spare money each month.
• Lasts five years - longer than a typical bankruptcy (bankruptcies are often over within a year, although you may be required to make contributions for three years).
• Will probably require you to release equity if you`re a homeowner.

It`s up to you to weigh up the pros and cons and decide whether an IVA is likely to be your best option, or if you`d better off learning more about the other options which may be available. If you`re unsure, a debt adviser can help.

For more information, click here or call 0800 195 2911 to speak to one of our debt advisers.

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