IVA and Equity
Whenever facing high debt issues, an individual has usually three main options:
- A debt consolidation loan – which is intended for paying off all the debts
- Entering an IVA (Individual Voluntary Arrangement)
- Filing for bankruptcy – which should be the last option, only after one has exhausted all the other options
The IVA is a very popular choice among individuals struggling with debts. If one can successfully go through the program by keeping up with all the necessary payments, in 60 months he/she will be debt free. There are however a few aspects regarding the IVA, that are not so convenient for debtors.
Firstly, if an individual owns a property, creditors may ask for a release of equity, so that they can recuperate their losses. Especially if the debtor has a very high amount of debt, and given his financial circumstances (the income most importantly) he cannot pay a high enough amount in monthly installments to cover the debt within five years, then a release from the property’s equity might be required.
It is very important, if you consider IVA as the best solution that you consult with a professional in prior. Most often, he will be able to redirect you towards the most suitable solution, and give you proper advice regarding your debt problems. A negative equity will not help you with your IVA. This means that you have too many outstanding secured debts, and if you sell the property, the money that you receive will not be enough to cover for all your debts.
Re-mortgaging is a very good solution for you, but only if there is no negative equity present. This way, with the money obtained you can pay a part of your debts to your creditors, and the rest of your debts will be paid in monthly installments (fixed monthly installments) over a predetermined period of time. Within the Individual Voluntary Arrangement equity that is free might be considered, and then it will be much easier to become debt free. Creditors cannot force you into selling your property when you are in an IVA, but bankruptcy supposes that you sell your home in order to pay back debts. Perhaps this is the greatest and most important difference between an IVA and filing for bankruptcy.
You need to realize soon enough that you are facing debt issues, and then you can avoid bankruptcy and other complications. If you just let debts accumulate, it will get more and more difficult to get out easily of debt related issues. Within documentation that you need to prepare together with an Insolvency practitioner, you also need to disclose important information such as how much property you own, what other valuable assets, your income/s, and other such financial aspects.
Based on your financial possibilities, within the proposal that you want to be presented at the Creditors’ meeting, you need to specify how much you are willing to pay on a monthly basis for the period of five years. If, based on calculations, with that amount you cannot fully cover your debts (for example not even 65%-70%), then creditors might require that you release your equity in order to pay off the difference as well in the last years of your IVA program.
It is obvious that every individual is being concerned when it comes to the safety of their home. This is why, the decision must be taken with utmost seriousness and accepting the repercussions. It is basically the price one individual has to pay because he didn’t keep up with the payments for loans in the past. On the other hand, creditors want to recuperate as much of their loss as possible, so they will use the option of equity release from your property whenever they see it fit.
However, there is a greater degree of protection an IVA offers, than bankruptcy does. Bankruptcy almost automatically means that you must sell your property and assets in order to clear off debts. Another downside for the debtor is that, if they will ask for an equity release, they will not get as much as 75% or 85% from it. These are the percentages suitable for someone with a good to excellent credit rating. Because of the bad credit rating, they automatically represent a greater degree of risk for the lender, so they will allow a much lower percentage. For example, if the equity is £30,000, with a good credit rating the individual might get 80%, which means £24,000 as a loan. Now, if the individual hold a bad credit rating he might get only 60%, which means £18,000. There is quite a difference, and if the money is not enough to cover for all the debts, the person still has to make sacrifices in order to be able to pay pack in full the debts.
Whichever the required methods for closing your debt fully, you need to act responsibly and keep up with the required payments. Only this way your credit rating will start building up, and you will get eligible for future loans on good terms. Only this time, you will deal with your loans more responsibly.