There are many advantages of using an Individual Voluntary Arrangement (IVA) to resolve your debt problems. The main one is that after paying what you can afford for often just 5 years any outstanding debt is written off. You can then continue with your life debt free.

Clearly this sounds very good. However you need to remember that the Arrangement is not a magic wand. Depending on your circumstances it will put a number of restrictions on you which could mean this it is not the best solution for you to choose.

You therefore need to understand and evaluate some of the potential problems before deciding to start this type of agreement. We will take a look at 5 of the most common ones.

Problem 1 – An IVA means living within a strict budget

When you start an IVA you will have to agree an amount which you will then pay towards your debts for 5 years. If you are to maintain these payments you will have to live within a budget that will be different from your usual spending up to now.

Once your reasonable living expenses have been taken from your income all of your disposable income will have to be paid into your Arrangement.  Therefore you will probably not be able to continue buying the luxuries you may be used to.

You will also need to save a certain amount of money from your agreed budget to ensure you can afford things like car repairs and other emergencies. However if you have an unexpected financial crisis it could be difficult to find the money for this.

Problem 2 – IVA payments are not fixed

Your payments are fixed when you start your IVA. However it is still possible that the amount you pay will increase at a later date.

If your income increases then your monthly payments could also go up. If this happens it does not mean that the Arrangement will be paid any faster. You will still make the same number of payments but the amount you repay your creditors overall will simply increase.

Of course this situation works both ways. So if your income goes down your payments can also be reduced.

BMD Tip: If you receive a windfall you will have to pay anything over £500 into the Arrangement. Windfalls include any money you receive unexpectedly such as a compensation claim, inheritance payment or a lottery win.

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Problem 3 – If you cannot keep up your payments your IVA could fail

When thinking about starting an IVA it is really important to be as sure as you can that you will be able to keep up the agreed payments for the full 5 year term.

If you start the Arrangement and then cannot keep up the payments it could fail meaning that the money that you have already paid will probably be lost and you will be back at square one.

To have the best possible chance of maintaining your payments you must make sure that they are not set too high. To prevent this you must be realistic when working out your required living expenses. If you feel that the payment you are being asked to pay is too much you should not feel pressured into starting the Arrangement and should consider alternative solutions.

BMD Tip: If you start to struggle with your payments you may be able to take a payment break or reduce them permanently to try and prevent the whole Arrangement from failing.

Problem 4 – Your credit rating will be affected by an IVA

Once you start an IVA your credit rating will be negatively affected. The fact that you have started the plan will be recorded on your credit file and remain there for 6 years.

This will make it difficult to get more credit until the Arrangement is completed. At this point you will be able to start improving your credit rating after but this will take time.

Problem 5 – You have to agree to release equity if you are a home owner

If you are a home owner an IVA will give you the significant advantage of legal protection from your home against charging orders. However if you have significant equity in your property you will be obliged to try and release some of this so that it can go towards paying more of your debt.

In the final (normally fifth) year of the agreement you will have to get a new valuation of your home. If there is equity in the property you will need to attempt to release as much of this as you can with a remortgage.

BMD Tip:  You will never be left with a mortgage that you cannot afford to continue paying. You will never be asked to increase the overall debt secured against your home by more than 85% of its value and your mortgage payments will not be allowed to increase by more than 50% of the amount you are currently paying into your IVA each month.

If you are unable to secure a remortgage then the idea of releasing equity is ignored and instead you will have to extend your standard payments by a further 12 months.