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IVA Risks

In common with any other major financial decision, there are risks associated with starting an IVA. These IVA risks should be considered as part of making a balanced decision on the best way to deal with problem debts.

Bankruptcy

Should your circumstances change during the course of an IVA you may find yourself unable to continue with the payments that were promised to your creditors. A reduction in payments may be agreed to by creditors, but in serious cases of changed circumstances an IVA failure may result in bankruptcy if there is no other viable way to deal with the situation. Creditors will typically prefer that a failed IVA does not turn into a bankruptcy and the IVA Supervisor is likely to take the same position. However the debtor may consider that no other realistic prospect for dealing with the debt exists. This may be of particular concern to those that have equity in their homes or those who may not be able to maintain their professional status if they were to become bankrupt. Another potential path to bankruptcy might occur if the IVA company came to consider that you were failing to cooperate with them. However, it should be noted that is only likely to arise in very serious cases of non-cooperation over a period of time.

Loss of Home

Should an IVA fail for any reason there might be a risk to your home depending upon what happens next. This is the case especially if you are a homeowner with equity in your home and you become bankrupt. As mentioned previously, creditors (other than HMRC perhaps) and your IVA Supervisor will not often force bankruptcy to happen. Such circumstances could arise if there was significant non-cooperation on your part with your IVA company, or if your circumstances changed dramatically so that an IVA was no longer a viable solution and you decided bankruptcy was the only other viable way to deal with the debts.

Credit Rating

If you proceed with an IVA your credit rating will be seriously affected, normally for a period of six years. This may create difficulties in obtaining credit even after the IVA has finished. Some mortgage lenders may ask, in their application forms, whether you have ever had an IVA. This can happen even after the IVA no longer appears on your credit file. A mortgage lender that asks this question may factor the answer into their decision whether to lend.

Change in Circumstances

If your financial circumstances change and you can no longer manage your IVA payment the IVA may be jeopardised or fail. There is a procedure by which an IVA company can ask creditors to accept a reduced dividend if your circumstances worsen, but acceptance or otherwise will be at the discretion of your creditors.

Inheritances and Other Windfalls

Inserted in the clauses of your IVA will almost certainly be a “windfall” clause. Should you come into money or assets during the course of an IVA you will be required under such a clause to pay all of this money into the IVA to help repay your creditors in full as well as the fees of your IVA company. If your windfall were of sufficient size you could potentially end up repaying more than your original debt total at the start of an IVA. Such windfalls may be an inheritance, a large discretionary redundancy payment or a lottery win for example.

IVA Monthly Payment Increases

During the course of your IVA your circumstances will be reviewed. If your financial position improves you are likely to be asked to increase your IVA payment (though you will still be allowed sufficient money to live reasonably). This situation is possible if you were to receive a substantial pay increase via a promotion or through finding new employment. It might also be the case if your expenditure were to reduce substantially, perhaps because a dependent child reached working age and became financially independent. Normally only 50% of the improvement in disposable income would be factored into an increased monthly IVA payment.

Increase in Mortgage Debt

If you have equity in your home, or equity develops during the course of your IVA (increasing property values, or the effect of a repayment mortgage), you may be expected to try to release some of this equity via a re-mortgage and pay it into an IVA. At the time of writing mortgage lending conditions make such borrowing almost impossible though this was not the case a few years ago (and may not be the case in the future). Such a re-mortgage will result in your having increased secured debts at the time that your IVA completes, may result in increased mortgage repayments (though a cap is applied to this) and may result in a longer overall repayment term for your mortgage.

IVA Extended to Six Years

If you have equity in your property, but you are unable to access this money (normally via a remortgage) your IVA may be extended. Typically a one year extension of an IVA will take place where this is the case and the funds cannot be obtained from another source (such as a family member for example).

Secured Debts Not Dealt With

An IVA only deals with unsecured debts such as credit cards and bank loans. Secured debts include mortgages, loans secured on homes and loans secured upon vehicles. If your original debt problem relates to having taken on secured commitments (such as the purchase of a comparatively expensive home) an IVA may not provide the overall assistance required to deal with the root cause of the debt issue.

Professional Risks

Some professionals may not be able to enter an IVA without jeopardising their professional status. For disciplined positions such as police officers, prison officers and members of the Armed Services there are procedures that must be followed in order to avoid or minimise professional problems connected to an IVA. Bank and other financial services employees should check their contracts of employment for clauses connected to IVA’s and insolvency. Even if a clause regarding IVA’s or insolvency does exist in a contract of employment it is worth speaking to HR departments and/or trade union representatives as, in reality, most employers tend to be supportive. Professionals such as lawyers and accountants may wish to check with their supervising authorities whether they are allowed to enter into an IVA.

Selecting a Poor IVA Company

In common with every other field of professional services there are good IVA providers and providers that provide a poor service. The poor IVA providers cause serious problems and frustration to clients at a time when they are financially vulnerable. Elsewhere on this site we have guides about how to ensure that you find the right IVA service for you. There are also recommended IVA companies on this site that you may wish to review and consider.

Paying Unnecessary Upfront IVA Fees

Lots of IVA “agents” will be happy to work through your circumstances with you and put together a case file ready to be passed to an IVA company to handle your IVA. Some of these agents will work out how much your IVA payment is likely to be and then ask you to make one or more payments of this sum to them while they prepare your case. This is a total waste of your time and money and may create legal risks. Had you gone directly to an IVA company you would not have to make these additional payments and would have saved the money. Your IVA could have started sooner which means that it would finish sooner. You could receive legal protection from your creditors sooner if the IVA process gets underway sooner. We urge you not to make such upfront payments to IVA agents. We suggest as an alternative that you build up an emergency fund with this cash that will help to protect you from unforeseen expenses during your IVA when credit will not be available to you. A sum of up to £500 is unlikely to have to be paid into an IVA, though you should make sure it is held in a savings account that is not connected to any of your creditors.

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