An Individual Voluntary Arrangement (IVA) is a formal legally binding debt solution which can be used to write off debt which you cannot afford to repay. Over 4000 people start this debt solution every month so there can be no question about its popularity.

However there are a number of important things that you need to consider before deciding whether or not this type of agreement is right for you.

1. How much debt do you owe?

An IVA is generally only suitable if you have £8,000-£10,000 or more of unsecured debt. Having said in certain circumstances that it may be possible to use the solution if your debt is lower than £8000. There is no upper limit to the amount of debt you can include.

You may be able to write off thousands of pounds of your debt by using this solution. This is because it only lasts for a standard period of five years. Any debt included in the Arrangement that you have been unable to repay after this time will be written off allowing you to get on with your life.

BMD Tip: You can only include unsecured debts in an IVA. As such you can include most of your normal consumer debts. However you cannot include secured debts such as a mortgage or secured loan or a car HP.

2. Are you a home owner?

If you own your property you cannot include your mortgage or other secured loans in your IVA. You have to continue to pay these as normal. However starting the Arrangement should mean that you always have sufficient money each month to afford these payments.

One of the main implications for home owners is that you must agree to release equity from your property if possible to increase the amount that you pay back to your creditors. In the 5th year of the Arrangement if there is equity in your property then within strict limits you must try and re-mortgage or get a secured loan to do this.

BMD Tip: If you are unable to release equity because you cannot get a new mortgage then it is likely that your payments will be extended by a further 12 months to compensate your creditors for this. However any equity in your property will then be yours to keep.

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3. Are you a company director?

If you are a company director using an IVA may be an ideal way of dealing with your personal debts. Using this debt solution will have no affect on your ability to continue in your role as a director running your business.

This is a significant advantage of this type of Arrangement over personal bankruptcy which would require you to resign from your position for at least twelve months.

In addition if you personally owe any tax to HMRC this can also be included in the Arrangement.

4. How will your credit rating be affected?

An IVA will significantly affect your credit rating. The fact that you have started the Arrangement will be recorded on your credit file and the record will remain there for six years.

Your ability to borrow more money during this time will be severely restricted and even things like taking new car finance or a new mobile phone contract will be much more difficult.

Your credit rating will not be affected for ever. After 6 years the record will be taken off your credit file and your credit rating will start to improve. There are a number of things you can do to speed up this process at that time.

5. Do the benefits of an IVA outweigh drawbacks for you?

An IVA can be a very good way of solving a difficult debt problem. However before deciding to go ahead you need to make sure that you understand both the benefits and downsides given your personal financial situation

Only once you know exactly what this type of Arrangement will mean for you can you then decide whether the benefits you will get from doing one will outweigh the drawbacks.