Is An IVA Best In The Current Economic Climate?

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Friday, December 5th, 2008 Subscribe To Our Feed

What are IVAs (Individual Voluntary Arrangements)? Why are they relevant today?

Nearly half a year ago, the Governor of the Bank of England famously said that “the nice decade” was behind us. Then, in August, Chancellor Alistair Darling warned that we were facing “arguably the worst” economic times we’ve seen in 60 years.

At times like this, one thing’s pretty sure. Many households are going to find life a lot tougher, financially speaking. In particular, they’re going to find their disposable income’s a lot lower than it was last year – around £2,500 lower, according to comparison site uSwitch.

So where do IVAs fit in to the picture? How can an IVA help someone with too much debt, and too little money to service it?

In short, an IVA is a way to cope with overwhelming unsecured debts – without declaring bankruptcy. In the short term, an IVA can reduce the amount of money they’re paying to their debts each month, bringing it down to an affordable level. In the long term, an IVA can help them write off the debt they can’t afford.

An IVA is normally only appropriate for people who owe around £15,000 or more to three or more unsecured debts, and whose combined monthly repayments to those debts actually exceed their disposable income.

Basically, an IVA is a legally binding agreement between an individual and his / her creditors. If they can agree on a repayment plan, the individual will commit to spending a fixed period (most IVAs last 5 years) making fixed monthly payments, based on the maximum they can afford once they’ve taken all essential expenses into account. If they’re a homeowner, they may also be expected to free up some of the equity in their home towards the end of the IVA.

In return, the creditors will agree to accept those lower repayments, to freeze interest, to refrain from (further) legal action, and to write off any outstanding debt when the IVA has been successfully concluded.

At a time like this, with the cost of living rising and many people’s disposable incomes shrinking, an IVA can make all the difference, helping people bring their debt repayments back in line with their disposable income. After all, their monthly payments to the IVA are carefully calculated to leave them with enough money every month to pay for the essential things in life, from mortgage / rent payments and fuel bills to petrol and food.

Even more important – in the long run – each payment they make to their IVA takes them one month closer to the day they know they’ll be debt free.

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