Myths about IVAs
Our advisers have put together a list of the most common misconceptions about IVAs. This guide looks at the myths and whether there is any truth within them.
Myth: I will lose my home
One of the benefits of choosing an IVA over bankruptcy is you won’t be required to realise all the equity in your home. However, if you have equity in your property your creditors may request you try and release some of this – usually by remortgaging.
If it isn’t possible to remortgage however you could extend your IVA by a year and make a further 12 monthly payments.
You will discuss your property beforehand when creating your IVA proposal and if you’re not happy with how it will be dealt with, you don’t have to go ahead with your IVA – you can look at alternative debt solutions.
Myth: I can’t have a bank account during an IVA
An overdraft is considered to be unsecured credit, and therefore if you owe money on yours it must be included in your IVA proposal.
While it’s true that this may cause a problem with your current bank account, as the bank could freeze the account preventing you from using it for general banking and bills, we recommend you set up a new current account with a different banking group – a ‘safe bank account’ – which you will use for holding your income and paying your bills.
Myth: I will have to account for every penny I spend
While it’s important you keep track of your finances, while making payments to an IVA, you are not expected to present details of every single pound spent and what it went towards.
Creditors understand that sometimes a little overspending can occur, but if you stick close to your initial income and expenditure calculations – that you wrote up at the start of your agreement – you should be able to continue to make your agreed IVA payments.
This expenditure calculation is based on what you spend each month and includes allowance for necessary expenses such as your mortgage or rent, council tax, utility bills, travel costs, phones, housekeeping and clothes.
Myth: I will have to sell my car
A car is an essential for many of us; we use it to get to work, visit family and to get around town when needed. Which is why the myth surrounding IVAs and cars is one that needs to be explained here.
In most instances, you will be able to keep hold of your vehicle(s), as creditors do not usually ask that you sell your car. If they do, you can always reject their suggestion and refrain from signing up to the IVA.
However, the expense of your vehicle may be considered, and if your creditors believe you could be using a cheaper vehicle they may ask you to downsize and put the excess money towards your debt repayments. The same rule applies if you are tied into a hire purchase and are paying more than £250 a month for your vehicle, your creditors may ask that you attempt to lower this monthly amount and re-finance.
Myth: My employers will find out about my IVA
IVAs are recorded on the public Insolvency Register and anyone can search this register. However it is usually only credit reference agencies that look at this register and they do so in order to update their records.
With this in mind your employer shouldn’t find out about your IVA – the only way they would probably find out would be if you told them or if your job required a credit check. This may be the case for finance related roles but credit checks as part of the employment process is not usually the norm.
If a credit check was a necessary element of your job reference or application, then we recommend you make them aware of your situation before you enter into the IVA.
Myth: I can’t save money and have an IVA
It’s important to note that any savings you do have will be considered an asset and will need to be disclosed when you initially set up your IVA, as they can be used towards repaying what you owe.
Your creditors, should they accept your proposal, will be wiping off a large part of your debts, and so expect you to put forward your savings as well as making monthly repayments, so you will be left with no savings when you begin your IVA.
However, once the IVA begins you will be free to use your ‘contingency’ allowance within your expenditure calculations to put into a savings account. You can also move money from other elements of your allowance and use this for savings. For example, you may have an allowance for car maintenance but don’t require any work to be done that month. This money can be moved into your savings account instead. You then have money in a savings account, for unforeseen expenditure, such as car repairs.
Another thing to consider is that if you receive a pay increase or earn additional income you will not be expected to put all of this towards your IVA – you will only be required to pay up to 50% of the additional funds so the rest could be put aside in a savings account.
Myth: I won’t have enough money to live on
An IVA will always be tailored to your situation to ensure you still have the means to pay your necessary expenses as well as paying enough to clear your debts.
While your income and expenditure takes into consideration households bills and expenses, your creditors will expect you to cut back on luxuries in order to repay your debts. This does not mean you will have to give up everything – you will be able to put enough money aside each month to live a comfortable standard of living.
Myth: My IVA will affect my partner
It’s unlikely that your IVA will have a negative impact on your partner; in fact sorting your debts will improve quality of life for both of you.
However, it’s a good idea to remember that creditors will need to understand that you and your partner are each contributing a fair share to the household expenses. Creditors are keen to understand that you are not subsidizing your partner, resulting in less money available for creditor’s repayments.
Myth: I can’t get an IVA on benefits
If you are on benefits, your creditors will always take into consideration your budget and if they believe you are able to make the repayments comfortably they will agree to the IVA. If benefits are your only source of income however it might be suggested you look at other debt solutions.
Myth: The payments in my IVA are set
Your monthly repayments are set according to what you can afford at the time of setting up your IVA.
However your repayments will be reviewed annually or when you experience a change in circumstances. It is possible for payments to be reduced to your IVA, providing your creditors agree.
*In the case of a one-off lump sum settlement