IVA firms offer three month payment holidays or 25% cut in repayments due to coronavirus
PEOPLE struggling to pay IVAs due to coronavirus can now ask for three month holidays and a 25 per cent cut to repayments.
An IVA - or an Individual Voluntary Agreement - is a legally binding plan with your creditors to help pay off your debts over a set period of time that in turn, has been approved by the courts.
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It must be set up by a professional called an insolvency practitioner who will charge a fee of around £5,000.
Debt repayments are made to the insolvency practitioner who distributes your cash to the lenders involved.
Your debts are then written off after five years, regardless of whether you've repaid them in full.
Until last week, help for IVA users was only offered on a case-by-case basis.
But due to the coronavirus crisis leaving millions furloughed or without work, the government has now introduced special measures to help struggling borrowers.
Similar action has already been taken for mortgage, personal loan, car finance, and payday borrowers.
What other debt management plans are available?
WE round up the other types of debt management plan available, and what you can do if you're struggling due to coronavirus.
Bankruptcy
Bankruptcy is a last resort if there is no other way to repay your debts. It usually lasts a year but it can be up to three years.
A bankruptcy practitioner called a trustee will take control of your assets and sell them to repay your debts.
If you can afford it, the trustee will ask you to make regular payments towards your debts from your income through an income payment agreement (IPA).
If you can’t agree on payment amounts for an IPA, the trustee can apply for an income payment order (IPO). If you don’t meet these payments, the trustee can then apply to extend your bankruptcy.
It is much more difficult to get credit after bankruptcy and your credit rating will be affected by up to six years.
You could lose your house, possessions and some professions won't let you work if you've been made bankrupt.
If you own a business it could be sold and the details of your bankruptcy will be published publically.
You have to pay a £680 fee to go bankrupt.
If you're struggling to meet your IPA or IPO repayments, these can be updated if your income changes. You must contact your trustee immediately if this happens.
Equally, if you get a lump sum while you’re paying an IPA or IPO, you may be asked to make a one-off payment from it.
Debt Relief Order (DRO)
A DRO is way to have your debts written off if you have under £20,000 of debt and no assests.
You have to pay a £90 fee but you don't have to make repayments and after 12 months your debts are written off.
You can't apply for a DRO if you're a homeowner. It will negatively affect your credit score for six years and it may be difficult to get credit during this time and details will be published publically.
Debt Management Plan (DMP)
A DMP is an informal agreement so you can stop it at any time and resume the normal debt repayments, or adjust your payments if your circumstances change, like you lose your job.
It ends when you've paid off the debt so it could last for decades.
Many firms charge a fee for the service, either upfront or one that's incorporated into your monthly payments.
If you're struggling due to coronavirus, contact your DMP provider so it can liaise with lenders on your behalf.
What do the new measures mean?
The government says those already with an an IVA or new IVA borrowers from April 20 can now take repayment holidays for up to three months.
This is in addition to any payment breaks you've already taken. It also won't affect your ability to request further repayment holidays in future.
Repayments can also be reduced by up to 25 per cent.
You will, however, still owe this money meaning future repayments will likely rise to cover the shortfall - although the government says IVAs can't be extended by more than 12 additional months.
This help isn't being offered automatically, so you need to ask for it, and it will be up to your insolvency practitioner to determine exactly what help to provide.
The measures are in place until at least October 20, 2020.
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It's also worth noting that if you're made redundant due to Covid-19 and your redundancy payments are in excess of six months net take home pay, it will be up to your insolvency practitioner to decide whether to use this cash to pay your creditors.
Normally, if you come into some money during your IVA your creditors may have the right to claim it. Any savings or pension payments also go to your creditor.
But the government's guidance says practitioners can't take equity out of your home to repay debts during the pandemic unless you agree to it.
Will this affect my credit score?
The UK's three credit reference agencies have agreed that repayment holidays or reduced repayments agreed as a result of the coronavirus crisis won't affect credit scores.
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But increasing your borrowing or taking out new products will still likely have an impact, as will simply stopping repayments without the agreement of your lender.
That said, in general people with IVAs may struggle to get credit anyway as the IVA itself remains on your credit file for six years.
If you fail to make repayments you could also be made bankrupt.