There are a number of clear benefits to using an Individual Voluntary Arrangement (IVA) to solve a debt problem. First and foremost it will help you write off what you are unable to repay. It also gives you and your home legal protection from further action by your creditors.

However it is important to understand that this solution is not suitable for everyone. Even if you meet the criteria required you need to fully understand the potential downsides.

The drawbacks do not carry the same significance for everyone but the solution is certainly not a magic wand. We explain some of the things that you need to know before starting the application process.

What happens if I can’t keep up my IVA payments?

Once you have started an IVA if you are then unable to keep up the agreed monthly payments you may have the opportunity to take a break from them or even reduce the amount you pay. However if this is not possible for whatever reason there may be no other option than to fail your Arrangement.

If this happens during the first 12-18 months it is likely that you will be back at square one again and still owe the majority of your original debt. This is because during this time most of your monthly payments go towards fees rather than repaying your debt.

On top of this if you are a home owner with equity in your property and your IVA fails there is a possibility that you could face being made bankrupt so that you can be forced to release the equity in your property.

Because of this it is very important not to start an IVA unless you are confident that you can maintain the agreed monthly payments especially if you are a home owner with equity in your property.

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What happens to my home in an IVA?

If you are renting your property there will be no affect on your home whatsoever. In fact your landlord will not even be told that you have started an IVA.

If you are a home owner the Arrangement will give you legal protection against the possibility of any of your creditors taking a charging order against your property and thus securing their debt against it which is a significant advantage.

However in return you have to agree to release equity from your property in the final year of the agreement by re-mortgaging if you can. If you are unable to re-mortgage then your payments will be extended by a further 12 months. However you should not count on this being the case.

What happens to my credit rating in an IVA?

The fact that you have started an IVA will be recorded on your credit file. This will mean that credit rating becomes much worse and you will not be able to borrow more money while you are in the Arrangement.

Once your Arrangement has finished you can start to build up your credit rating again and even by a house if the future if you wish.

BMD Tip: In reality an IVA will not affect your credit rating any more than starting any other debt management solution. For example if you start a Debt Management Plan (DMP) missed payments will be recorded on your file again badly affecting your credit rating.

Windfall payments have to be paid into your IVA

While you are in an IVA any financial windfall you receive such as an inheritance, lottery win or PPI compensation will have to be paid into the Arrangement.

Paying in windfalls if you receive them will mean that the arrangement is paid off any sooner. You still have to make all the payments you have agreed. It simply means that your creditors will be repaid more overall.

This situation can be seen as a distinct disadvantage of the solution as you do not have the flexibility of deciding what you will do with such a windfall. All of it will normally have to be used to repay debt.

For this reason if you feel that you might come into a windfall in the near future (perhaps you feel you might receive an inheritance) then it might be sensible not to start an IVA. Instead you could chose a  Debt Management Plan to give you a breathing space from your debts until the windfall is received.