IVAs explained

An IVA (Individual Voluntary Arrangement) is a debt solution designed for people with particularly large debts - usually £15,000 or higher. It can allow you to avoid bankruptcy by agreeing to repay a set percentage of your debts to your lenders over a pre-agreed time period (usually five years), after which the remaining debt will be written off.

As with any major financial decision, it's important to understand what an IVA involves, and what the consequences are if you fail to keep up on the agreement. Here is a quick guide to how an IVA works.

How an IVA works: step-by-step

#1: Speak to a debt adviser
Before you can apply for an IVA, you will need to speak to a professional debt adviser or an Insolvency Practitioner to discuss your situation. It may be that another debt solution is more appropriate for your circumstances - a good debt adviser can let you know whether this is the case.

If your debt adviser thinks an IVA is your best option, they will refer your case to an Insolvency Practitioner, who will work with you to draw up your IVA proposal. This details how much you are able to pay towards each of your debts, based on how much you can afford after your essential costs have been covered.

#2: The IVA proposal is sent to your creditors
Your creditors will be invited to approve the IVA proposal. This gives your creditors the opportunity to 'vote' either for or against the IVA terms. For the IVA to go ahead, creditors accounting for 75% of the total debt must approve the IVA.

#3: The IVA begins
If your creditors approve the terms, then the IVA can begin. You will make a single monthly payment to your Insolvency Practitioner, who will be responsible for distributing the agreed amounts between your creditors on a pro rata basis (based on what proportion of your total debt is owed to each). This will normally continue for five years.

Since an IVA is a legally-binding agreement, both you and your creditors must abide by the terms: you must keep up your payments for the duration of the agreement, while your creditors cannot pursue any further action against your debts. Interest on your debts is frozen, meaning they cannot continue to grow.

#4: Equity release in final year
If you are a homeowner, you may be expected to release some of the equity in your home in the 54th month (half way through the final year) of your IVA.

#5: 60 months - the IVA is complete
Once you have made your final payment (usually in the 60th month, but this depends on your terms), the IVA will be complete. Any remaining unsecured debt (in relation to the IVA) will be considered written off, leaving you to get on with your life as normal.

However, be aware that an IVA remains on your credit report for six years after it begins - so even once your terms have finished, the IVA will be recorded for a further year. This will make it more difficult to obtain credit until this period has expired.

Managing debt - with the 'nice decade' behind us

Following Mervyn King’s warning that “the nice decade is behind us”, debt management company Gregory Pennington reminds borrowers that any major change in circumstance, whether personal or national, should prompt them to review the way they manage their debts. “Even in good times, managing debt isn’t always easy,” says a spokesperson for the company, “but the Governor of the Bank of England reminds us that those good times could be over – and that the economic worries of the nation will directly affect us all as individuals.”

For individuals, the actual transition from ‘good times’ to ‘bad times’ can be a particularly difficult period: “Many people have grown used to making monthly debt repayments that take up their entire disposable income. It’s a dangerous balancing act which can easily be upset by any change in their disposable income, whether it’s due to reduced income or to inflationary price increases.”

“Anyone in that situation today will remember 2008 as the year that demonstrated the dangers of over-commitment and the importance of considering the worst-case scenario before taking out credit. In the short term, however, they’re looking for an immediate solution to their debt problems – and for many of them, we believe our debt management plan may be that solution.”

Like any debt solution, debt management doesn’t exist in a vacuum. Creditors are all too familiar with the effects of the credit crunch and the uncertainty in today’s housing market. They understand that debt consolidation may no longer be an option for many people. At the same time, they understand that a debt management plan offers them something which insolvency doesn’t: complete repayment of all monies owed.

“From the borrower’s perspective, debt management can deliver the flexibility they’re looking for. Our clients depend on us to keep payments at an affordable level by renegotiating with their creditors if their disposable income shrinks. This is always a major benefit of our debt management plan, but the current volatility of the financial world makes it more valuable than ever.”

Debt Consolidation Rule Number 1: Know Your Debt

At a time like this, it’s no surprise that many borrowers with debt problems are looking to solve them with a debt consolidation loan. What is surprising is the lack of ‘debt awareness’ which people seem to exhibit: in a survey by CreditExpert.co.uk, only 26% of respondents were able to ‘accurately state’ how much they had left to pay on their loans.

Tackling a problem is never easy when we don’t truly understand it – not just where it came from, but exactly where we stand today. So it’s particularly worrying to note that fully 10% of respondents admitted to having no idea how much they owed. Without understanding the debts in question, it’s hard to know whether consolidating them is even the right debt solution!
After all, debt consolidation loans aren’t the only solution to debt. Many people in debt could be better off looking into debt management, for example, or an IVA (Individual Voluntary Arrangement) or Trust Deed (for residents of Scotland), rather than consolidating their debts. Someone whose debts are truly out of control may even need to talk to a debt adviser about bankruptcy.

And debt awareness doesn’t end with identifying the right debt solution. Even someone who knows that debt consolidation is the best way forward still needs to understand the differences between the various debt consolidation loans available. According to the survey, an alarming proportion of the populace don’t know the APR (Annual Percentage Rate) they’re paying for their credit cards, loans and overdrafts. Even though the majority know what their overdraft limit is, 36% of people ‘are unsure what APR is’ – something which makes it almost impossible to choose the most attractive debt consolidation loan.

“As with any financial decision, it’s extremely unwise to consolidate debts without first ‘doing the maths’,” said a spokesperson for debt consolidation experts debtadvisersdirect.co.uk. “By reducing someone’s monthly payments, a debt consolidation loan can turn an overwhelming debt problem into something they can deal with. However, it’s important to weigh that immediate benefit against the long-term consequences. If someone arranges to repay a debt more slowly, it stands to reason that they’ll be paying interest for longer – unless the consolidation loan’s APR is significantly lower than the original debts’, this can actually increase the total amount repaid. Clearly, someone who understands the importance of APR figures stands a much better chance of finding the best consolidation loan on offer.”

But that doesn’t mean it takes an honours degree in Finance to find the right loan. “A professional debt adviser can help borrowers make sense of their debts and their options, from understanding the small print to drawing up a budget. At debtadvisersdirect.co.uk, we’ve been helping people with financial difficulties for 15 years. In fact, we were one of the first companies to offer free debt advice to people in the UK. When people phone us, we don’t just assume that debt consolidation is right for them – we can review their financial situation, take them through all the debt solutions available and help them make their mind up about which is the most suitable.”

Debt consolidation v IVA?

Why do people consolidate their debts or enter into IVAs (Individual Voluntary Arrangements)? People in debt may be looking for a debt solution that can reduce their monthly debt repayments and help them get out of debt at a rate they can afford.

Debt consolidation loans and IVAs can both do this, but they’re very different debt solutions, suitable for people in very different situations. Neither is better or worse than the other – it’s a question of which is more suitable for the individual in debt.

So, first of all, there’s the issue of eligibility. As a formal debt solution and a form of insolvency, IVAs are only available to people who genuinely can’t keep up with their repayments to their unsecured debts.

Debt consolidation loans are, in theory, available to anyone – everyone has the right to take out a new loan that’s large enough to pay off their other unsecured debts.

Second, there’s the total debt to consider. IVAs are normally only suitable for people who owe at least £15,000, although this figure isn’t set in stone.

There’s no minimum amount that makes someone eligible for a debt consolidation loan – if they think it’ll improve their financial situation, they’re free to consolidate their debts if they want to, as long as they can find a loan.

Third, there’s the impact on the individual’s credit rating. By simplifying their finances and reducing their monthly debt repayments, a debt consolidation can help them avoid late / non-payments, which should help them keep their credit rating from suffering.

An IVA, on the other hand, is a form of insolvency – it’s not regarded as being as serious as bankruptcy, but it will have a serious impact on someone’s credit rating, and probably make credit harder to obtain and more expensive. It’ll stay on their credit report for six years, although this won’t really be an issue for the first five of those years (the normal length of an IVA), as people aren’t normally allowed to borrow money while their IVA is in progress.

Fourth, there’s the potential impact on the borrower’s home (if they’re a homeowner). Many people choose to consolidate their debts with a secured loan, securing their new loan against their house. This should get them a better rate of interest than they’d get with an unsecured debt consolidation loan, but they’re potentially putting their home at risk – if they don’t keep up their monthly payments, the lender could repossess their home (although lenders do see this as a last resort and will try to find another solution to the problem).

IVAs can protect a borrower’s home. Unlike bankruptcy, an IVA is very unlikely to require the homeowner to sell their home, although they are likely to have to free up some of the equity in their home towards the end of the IVA, so they can pay off more of their debt.

Fifth, there’s the question of writing off debt. With an IVA, the individual basically agrees to pay off as much of the debt as they realistically can over the next five years. They commit to making regular, fixed payments – the maximum they can afford once they’ve taken their essential monthly expenses into account. In return, the creditors agree to write off any outstanding debt at the end of that period – as long as the borrower has kept up with their payments.

With a debt consolidation loan, there’s no question of writing off any debt. The individual is simply borrowing enough from a new lender to pay off their ‘old’ lenders, so there’s no reason anyone should agree to write off anything!

If you’re wondering whether a debt consolidation loan or IVA could be the debt solution for you, contact a professional debt adviser.

Economy still uncertain despite base rate cut

Debt management company Gregory Pennington have warned that the economy remains uncertain, despite a number of signals suggesting a potential recovery, and have advised anyone facing severe financial problems to seek professional debt advice as soon as possible.

The Bank of England Monetary Policy Committee’s announcement on Wednesday that the base rate would fall to 4.5% was intended to calm fears surrounding the money market and increase lenders’ willingness to do business with one another, subsequently increasing liquidity and boosting the loans market.

A number of lenders announced cuts to their mortgage rates following the base rate announcement – which may come as a relief to prospective homeowners or existing homeowners looking to remortgage, following many lenders’ reluctance to respond to the last base rate drop.

Meanwhile, petrol prices recently fell to as little as 103.9 pence per litre, while food price growth slowed by 0.2% in September, according to the British Retail Consortium (BRC) – arousing speculation that overall inflation has hit its peak and will now begin to slow.

However, a spokesperson for Gregory Pennington commented that while there are encouraging signs for the economy, there is no guarantee that further difficulty for the economy can be avoided.
“The first thing to bear in mind is that while the base rate cut is intended to help the economy, it was brought in as an emergency measure,” she said. “The threat of a severe economic downturn is still looming and there are no guarantees it can be avoided.

“The fall in oil and food prices are very encouraging, but both are heavily affected by external factors, largely outside our Government’s control.”

The debt management company spokesperson was keen to emphasise the continued need to take care over finances and manage debts effectively in the coming months. “There is still the possibility that things could get tighter in the near future, so it pays to tackle any financial issues now, rather than waiting to see what happens next.

“People who are struggling with debt are especially at risk, because their finances are already stretched – and any further rises in costs of living could make those debts unmanageable.

“As always, we advise anyone struggling with debt to seek expert debt help as soon as possible. Leaving it too late could allow your debts to grow, which is particularly dangerous if costs of living do continue to rise.

“There are a number of debt solutions to help with various financial situations. A debt management plan is a flexible means of getting out of debt in which your repayments are based on how much you can afford, and in some cases interest and other charges can be frozen.

“Debt consolidation involves grouping your debts into one convenient monthly payment, therefore simplifying your finances, and your debt can also be spread out over a longer period of time, meaning monthly payments are smaller – although this can mean you pay more interest in the long run.

“For more serious debts of over £15,000, an IVA (Individual Voluntary Arrangement) might be more appropriate. These work by agreeing with your creditors to make payments based on what you can afford for a period of five years, after which the remaining debt is considered settled.”

Debt Management and Rising Inflation

What makes debt management a good way of getting through a financial downturn? In a word: affordability. A well-thought-out debt management plan offers borrowers a chance to bring their expenditure back in line with their income – something that’s particularly important when the cost of living is on the rise.

In August, the official inflation rate (CPI – Consumer Prices Index) reached 4.7%. In other words, the cost of living is going up quite quickly: nowhere near as quickly as it was in 1975, when inflation hit 25%, but a lot faster than a year ago, when it was under 2%. It’s normal for things to get more expensive, but when prices rise faster than salaries, people simply have less money left over (disposable income) once they’ve paid their essential bills. For people already struggling to manage their debt repayments, any decrease in disposable income can have serious consequences.

This is where debt management can help: when someone finds they can’t keep up with their monthly debt payments, they may be able to re-negotiate those payments. Basically, there are two kinds of debt management.

There’s what some people call ‘DIY debt management’. A borrower can call their creditors, explain why they can’t afford to keep on paying as originally agreed, and see what the creditors suggest. They might, for instance, agree to accept lower payments, freeze interest or waive charges.

Many people with financial problems prefer to ask debt management experts to talk to creditors on their behalf. Professional debt management organisations, after all, should have much more experience in this kind of negotiation. They may have long-standing relationships with creditors, which could help them reach an agreement that reflects both the individual’s needs and the creditors’.

There’s no universal agreement on which kind of debt management plan is better. Some people want to handle the negotiations themselves, and see no need to talk to debt management professionals. Others are happy to get them involved, whether it’s because they’re not confident discussing finances with their creditors, or because they want help budgeting and drawing up a repayment plan that creditors are likely to accept.

Either way, it’s important to realise that creditors don’t have to agree to any changes. They’re free to consider legal action if they think that’s the best way of recovering their money. But if the individual obviously can’t keep up with payments as originally agreed, there’s a good chance creditors will decide it makes more sense to amend the repayment plan. This is the point of debt management – the individual can bring their repayments down an affordable level, and creditors get their money back (even if it’s more slowly) without resorting to legal action and/or debt collectors.

Read more about debt management and other debt solutions such as debt consolidation & IVAs at www.debtadvisersdirect.co.uk.

Debt and the Changing Face of the Credit Market

Food prices up, repossessions up, house prices down… these are troublesome times, especially for people whose monthly debt repayments are taking up valuable funds they need to cope with the ever-increasing cost of living.

After years of easy access to credit, many households have grown used to the idea that they can consolidate their debts, effectively spreading their repayments out over a number of years to reduce their monthly repayments. It may end up costing more, but it’s a tried-and-tested way of making debt repayments more manageable, keeping debts from snowballing into a serious debt problem.

Today, however, the credit market has changed, as the Bank of England’s latest Credit Conditions Survey proves. Covering (among other things) secured and unsecured lending to households, the Survey shows what lenders in the UK have noticed in the last three months, and what they expect to see in the next three.

In 2008’s Q2 Survey, lenders revealed that they’d reduced the availability of both secured credit (from secured loans to mortgages) and unsecured credit (from credit cards to unsecured loans). What’s more, they expected to see further declines in the availability of both secured and unsecured credit in the next three months.

For secured loans and other secured credit, Q2 seems to have seen the worst actual reduction in availability (around 45%). Availability is expected to go down in Q3 as well, but by only about half as much.

The availability of unsecured loans and other forms of unsecured credit came down by around 25% in Q2, and it’s expected to drop slightly more than that in Q3.

For secured loans and unsecured loans alike, lenders are basically tightening their credit scoring criteria, which means they may well refuse loans which they would have granted a year or so ago.

When it comes to secured loans, they’re also ‘decreasing maximum loan to value (LTV) ratios’, which means they’re being more cautious about securing loans against the value of a property. According to the Nationwide House Price Index, the typical house is worth £15,000 less than it was a year ago, so it’s difficult to be sure how much equity a homeowner will actually own 12 months from now.

There’s no question that this is worrying news for people who were thinking of consolidating their debts. Now that lenders have become so much more cautious about lending money, there’s no guarantee that they’ll be able to get a consolidation loan (either secured or unsecured).

However, it’s important to realise that loans – both secured and unsecured – are by no means unavailable. It’s true that some people may find it difficult to find the debt consolidation loan they need, but it’s often a case of finding a loan provider who specialises in helping people in their financial situation.

Plus, a consolidation loan isn’t always the best debt solution anyway. Many people in debt would be better off with a debt management plan, an IVA (Individual Voluntary Arrangement) or a protected Trust Deed (for residents of Scotland only).

Each debt solution comes with its own distinct benefits and drawbacks, and identifying the most appropriate solution requires an in-depth understanding of the credit market, as well as the of debt solutions themselves. It’s never advisable to choose a debt solution without first talking to an impartial debt adviser who can explain the details of each and recommend the most appropriate one(s).

To read more about different debt solutions such as debt consolidation & IVAs, visit http://www.debtadvisersdirect.co.uk