It comes as no surprise that some GMB members are struggling to come to terms with managing their finances or repaying outstanding debts because of the current escalating cost-of-living crisis.
At the same time, members are being bombarded by debt management firms, promising easy ways to escape debt problems.
However, the true position is far harsher, and those who assume that IVAs or bankruptcy offers a painless exit from spiralling debts, are slowly discovering the harsh truth and hidden longer-term drawbacks of these financial arrangements.
As a responsible, regulated lender (debt management is an unregulated industry), GMB Credit Union cares about our members’ long-term financial wellbeing. If members are struggling to cope with debt, we would always encourage them to contact us as soon as possible.
IVAs or bankruptcy should be seen as a last resort and, in most cases, are not in the best long-term interests of members.
What is an IVA?
An IVA, or Individual Voluntary Arrangement, is a form of debt management that freezes all interest and fees for a fixed period on your unsecured debts.
As it’s a legally binding agreement, an IVA can – but won’t always – prevent your creditors from taking legal action against you.
How does an IVA work?
It allows you to pay a fixed, affordable amount off your debts, which is divided between your creditors. Your creditors must agree to your IVA before it goes ahead.
Usually, an IVA lasts around five or six years. Once your IVA is completed, parts of your debts can be written off.
It is important to remember that if you’re unable to keep up with agreed repayments, the consequences can be as serious as losing your home or, in some circumstances, bankruptcy.
Issues with IVAs as a debt solution
IVAs may feel like a good debt management solution at first glance due to the fixed repayments and the chance of protection from legal action.
However, there are many important things to consider before going ahead with an IVA, such as:
IVAs do not guarantee legal protection
Often, legal protection is promoted as a major benefit of an IVA. However, your creditors can choose to reject your IVA proposal as a debt management solution, so it doesn’t guarantee protection from your creditors or bailiffs.
IVAs will mean managing a very strict long-term budget
Agreeing to an IVA involves sticking to an extremely strict budget with regular personal finance reviews in place to monitor your spending.
Broadly speaking, any disposable income should go towards your IVA payments, limiting you to spending your spare money on essentials only.
This will considerably restrict your lifestyle for a period of five to six years and is something to consider very seriously before rushing into an IVA.
IVAs will impact your credit score
An IVA negatively impacts your credit rating, as it has to be registered on your credit file and stays there for six years from your approval date. Even if you complete your IVA early, this won’t improve your credit score.
Therefore, you will struggle to access services like loans, mortgages, credit cards or mobile phone contracts in the future, even once your IVA term is completed.
When your IVA term ends, you will have to rebuild your credit rating, which can be a long and challenging process.
After your IVA has been cleared from your credit file, you may still be asked to declare it before applying for credit, loans, mortgages, rental contracts, or other financial products.
IVAs are public which may impact your personal or professional life
Falling into financial difficulty can cause shame and anxiety, so you may prefer to keep your circumstances private while you work towards clearing debts.
When you agree to an Individual Voluntary Agreement, it is listed on the Insolvency Register, which has public access. And while it’s not something most people look at, you may still feel uncomfortable knowing someone in your private or professional life could obtain this information about you.
Moreover, employers may ask you to declare it during the application process for a new job.
IVAs will negatively impact your future ability to borrow
An IVA can affect your ability to borrow for many years, as it stays on your credit file for six years after the arrangement is completed, which is normally five to six years too.
Similarly, while certain types of credit will still be available to you, you’ll be faced with high-interest rates and low limits. If you go ahead with these options, you may find yourself financially stretched and restricted, which could create further financial difficulties in the future.
If you wish to obtain credit of more than £500 during your IVA term, you must obtain written permission from the insolvency practitioner who set up your IVA.
IVAs come with substantial fees and costs
IVAs are not free and always come with substantial costs and fees, such as a nominee fee, supervisor fee, and disbursements.
Typically, these fees will amount to around £5,000, which are added to your debts. These additional costs can be charged in various ways i.e., upfront, however, debt management companies may adopt alternative ways of collection in order to entice debtors into IVAs.
IVAs will affect your life for many years
Taking on an IVA will impact your well-being for a long time and can affect any future income or assets you acquire. For example, inheriting money, large wage bonuses or gifts must be declared to the insolvency practitioner. If you are a homeowner, the equity in your home will be considered as part of your IVA too.
Financial Wellbeing Alert
As a Credit Union, we feel very strongly about GMB members accessing appropriate advice and debt management solutions and not being afraid to contact their creditors as early as possible should issues arise.
We believe IVAs should be seen as a last resort in debt management and that there are alternatives that must be explored first to avoid harming a member’s credit and financial independence in the longer term.
The marketplace is awash with debt management companies promoting the simplicity of clearing debts through an IVA arrangement. We believe that many of these debt management companies’ interests are driven solely by profit, and we deplore the attitude that profit can be made from our members who have no control over the current economic crisis.
So, when reviewing your financial wellbeing, please consider the following:
- Explore all your options
- Think long-term
- Contact creditors early but take your time on the solution offered
- Get advice, don’t simply rush into arrangements, such as IVA
- Find a solution which is in your best interests, not the providers
Alternatives to an IVA
You can enter an IVA if you owe less than £10,000 to two or more creditors. Creditors are people you owe money to. However, fees are very high and if you want to clear your debts without resorting to the long-term restrictions of an IVA, it is better to contact creditors directly to agree an informal arrangement to repay your debts.
As a member of GMB Credit Union, you have access to fair, ethical, and affordable loans to consolidate your debts and repay them in a manageable and prudent way.
If your circumstances change and you’re struggling to make your loan payments, we offer various solutions to support you – like a pause or reduction in your repayments – and we can help you find your best options if you get in touch with us.
Already a Credit Union member? Talk to us, using your Nivo app and we can discuss your circumstances. We can always call you back at a convenient time to discuss your position in more detail.
Ready to join us and start on the path to financial wellbeing? All GMB Credit Union members are welcome. Find out how to join our community here.