What to do if you're in debt

25 September 2009

Most people would agree that bankruptcy is best avoided at all costs - especially if you own your home or business, as these will be taken from you to pay your creditors.

However, for many of the 3.4 million British adults with severe debt problems, the amount they owe and can afford to repay makes paying off their debts impossible and bankruptcy may seem the only option. There is however, an alternative which may be suitable for some - an individual voluntary arrangement (IVA).

If you are in a situation where there seems to be no way that you can manage to clear your debts in full - even via a debt management plan running over a number of years - then an IVA could prove the best way to avoid going bankrupt. (IVAs are only available in England and Wales, with a Trust Deed providing the closest equivalent for those living in Scotland - see below for more details.)

What is an IVA?

IVAs are essentially agreements between an individual and his or her unsecured creditors - administered by a qualified debt adviser or insolvency practitioner.

Generally lasting for five years, they protect against any further interest or charges building up on your debts. Over the five-year period you will pay an agreed amount to your creditors. Once that period ends any remaining debts will be wiped out.

Who qualifies for an IVA?

You must have a regular income to qualify for an IVA as one of the conditions is that you pay a fixed amount towards your debt repayment every month - unless a lump sum payment is agreed at the outset.

The unsecured debts in question will usually be £15,000 or more, from at least three different sources.

For an IVA to work, at least 75% of your creditors must also agree to the money owed to them being repaid this way.

Once it is agreed, it is legally binding for all the unsecured creditors involved, as well as the borrower.


What are the advantages and disadvantages of an IVA?

The main advantages of signing up to an IVA include an end to all calls and letters chasing payment from you and the knowledge that you will be debt free after five years. Unlike bankruptcy, IVAs also have no impact on your involvement with organisations such as the Police Force and will not require you to give up your home.

However, you may have to release some of the equity from your property - or any assets deemed to be of excessive value - to help to pay off your debts. This includes any windfalls or inheritance that you receive while the IVA is in effect.

Other disadvantages include that you will be penalised should you become unable to meet the agreed repayments and that your credit rating will be adversely affected, making it harder for you to borrow in the future.

What impact will an IVA have on my credit rating?

While ending up in a situation in which you need to take out an IVA is unlikely to be applauded by banks and other lenders, it is less of a black mark than going bankrupt.

For example, unlike with bankruptcy and Debt Relief Orders (DROs) - set up by the government as a simple alternative to bankruptcy for those on very low incomes - an IVA will not result in the need to change your current account.

However, you may be advised to move to a basic bank account that involves no overdraft or borrowing facility by your IVA adviser. Most of the large banks and building societies, including Barclays, The Cooperative Bank and Nationwide, offer accounts of this kind.

You are also unlikely to be able to borrow again during the term of the IVA, which is usually five years. Once it has finished, it will also remain on your file for a further 12 months. You'll also find it very difficult to get credit-related products such as loans, credit cards or a mortgage.  

I live in Scotland. Tell me more about Trust Deeds.

A Trust Deed is a legally binding agreement between an individual with debts they are unable to pay and a licensed Insolvency Practitioner, who as the Trustee will put together the repayment proposal and administer the Deed. It allows you to pay as much of your debts as you can over a three-year period, although some agreements can be longer or shorter.

As with an IVA, all interest and charges on the debts built up will be frozen once the agreement is set up. A percentage of the debts - in some cases up to 90% - will also be waived.

However, not all types of debt can be included in a Trust Deed as arrangements of this kind are only suitable for unsecured debts such as credit card and personal loan balances. As with an IVA, debts that are secured against property or other assets, such as mortgages, must be dealt with separately.

Where can I go to get help?

There are a number of options available if you are considering an IVA. The debt charities such as the Consumer Credit Counselling Service offer IVAs as do some of the debt management firms such as Think Money and Debt Advisory Line.

Your adviser should be able to talk you through all the options and recommend the best solution to your financial difficulties as it may be that an IVA isn't the most suitable option for you.

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