Individual Voluntary Arrangements are growing in popularity, with almost 90,000 issued in 2022, but they’re not right for everyone. Find the information you need to make an informed decision with our myth busting guide to IVAs
Myth: Most people go into debt due to overspending
Faced with the rising cost-of-living and increased pressures on household budgets, more people than ever before are struggling to pay their bills and falling into debt. In fact, 9,600 people contacted Citizens’ Advice seeking debt advice every day between January and April 2023.
Despite this, a common misconception exists that people end up in debt due to acting irresponsibly. This could mean reckless credit card spending, splashing out on luxuries, or mismanaging their finances.
The reality is that most people who seek debt advice are struggling with debt due to circumstances beyond their control. Sudden interest rate changes, unstable employment, and emergency costs can all make it difficult to keep up with essential payments like utility bills and Council Tax charges.
Myth: Asking for help should be a last resort
Missing payments and falling behind with your debts can take its toll on your mental health. It’s not unusual for people in financial difficulty to feel too anxious to open bills, preferring to ignore the problem until a more serious escalation, such as a visit from a bailiff, forces them to act.
There’s no reason why you need to wait to seek independent debt advice or think of this step as a last resort. In fact, the earlier you reach out and start investigating the options available, the more likely it is that you’ll be able to find a solution that works for you before the situation gets any worse.
At My Debt Plan, our friendly debt experts will have a free, confidential conversation with you and take the time to fully understand your financial situation and individual circumstances. This consultation allows us to find the most appropriate debt management solution for you.
Myth: An IVA is a quick fix
While an Individual Voluntary Arrangement (IVA) can work well for many people, it’s not something that should be entered into without careful consideration. An IVA isn’t a quick fix, and it won’t be the right debt management solution for everyone.
An IVA is a formal agreement, which is legally binding and can last for five or six years. During this time, your interest and charges will be frozen, and your creditors won’t be allowed to contact you. Instead, you’ll make a fixed repayment to your Insolvency Practitioner each month to be distributed between your creditors. Once you reach the end of the agreement, any outstanding debts will usually be written off.
However, this does mean you will be tied into the agreement for several years, and it’s not always easy to change your payment amount or bring the IVA to an end early if your financial situation changes in that time.
Myth: IVAs can work for everyone
When it comes to finding a debt management solution, there’s no such thing as one size fits all. There are several different options available, each suited to people with different financial circumstances and different types of debts. An IVA is typically a good fit for people with secure or regular employment, a healthy disposable income (even if it isn’t enough to cover your current debt repayment amount), and an asset like a home. They’re usually not the right solution for people who have an unstable income, rely on benefits, have an extremely limited amount of disposable income, and rent their home.
Myth: It’s okay if I fall behind with my IVA payments
One of the reasons why it’s important that people in an IVA have a regular source of income throughout the agreement term is that they must keep up with their agreed monthly repayments. An IVA is a legal agreement and approved by the court. If you fall behind and fail to pay the agreed IVA repayment, the agreement could be terminated, leading to further financial hardship. Unfortunately, this is a relatively common occurrence. Government data shows that 5.5% of IVAs registered in 2021 were terminated within one year of being approved.
Myth: IVAs are completely free
While debt advice is often available for free, there are some costs involved with setting up an IVA. In fact, it may be a more expensive debt management solution than some other options. You’ll usually be asked to pay an initial set-up fee as well as a handling fee each time you make a repayment. These monthly fees are typically based on your total debt amount but should not be so high that they make your payment unaffordable. Don’t be afraid to ask for a list of any fees and charges that will apply to your agreement upfront so that you know exactly where you stand.
Myth: There is no code of conduct for IVA providers
Although IVA providers are not currently regulated by the Financial Conduct Authority, the Insolvency Practitioners Association (IPA) is a membership body that licences insolvency practitioners under the Insolvency Act 1986. My Debt Plan is a member of the IPA, which means that we agree to act in accordance with the body’s Ethics Code: acting with integrity and objectivity, providing confidentiality, acting professionally, and working with appropriate diligence and care.
Myth: IVAs are the only debt management solution available
When choosing a debt management solution, take time to consider all the options available. An IVA is just one of the many solutions available and, while it can be effective for many people, it’s not the right choice for everyone.
Other debt management options include:
Debt Management Plan (DMP) – this is an informal agreement between you and your creditors. You can set up a DMP yourself or via a third party and propose affordable reduced repayments. However, your creditors don’t have to agree to a DMP, don’t have to freeze your interest or charges, and could still take further action against you.
Debt Relief Order (DRO) – a legally binding solution, a DRO is designed to be an alternative to bankruptcy with a fee of £90. It frees you from debt repayments for 12 months and any remaining debts will often be written off once these 12 months have elapsed. Terms and conditions apply; you must have less than £75 disposable income, no assets worth more than £2,000, and have less than £30,000 in debt.
Bankruptcy – arguably the most serious personal debt solution, bankruptcy might be the best solution for you if you’re unable to pay anything towards your debts and have little or no assets. Bankruptcy can require you to sell any high value assets, but once approved, your creditors cannot contact you or take further recovery action against you.
Looking to find out more about the debt management solutions available? Our friendly team of experts is here to help. Give us a call on 0161 8260 585 or send a message here
