Before you enter into an IVA, it is important to know what will happen if it doesn’t work out as planned. This is fairly rare, but it is nonetheless a good idea to have a backup plan in place.
Why might an IVA fail?
The most likely reasons for an IVA to fail are:
- If you do not keep up with payments, without informing your Insolvency Practitioner (IP)
- If your circumstances change, and your creditors are not willing to accept reduced payments
- If you took on further credit during your IVA without permission from your IP
- If details given on your initial application are proven to be incorrect
Basically, an IVA fails if you do not stick to its terms. This usually means not keeping up with the payments agreed upon at the start of the plan.Check if you qualify for an IVA
What happens when an IVA fails?
If an IVA does fail, the first thing your IP will do is send you a letter of termination and a failure report. These reports officially state that your IVA has failed, and explains why. The report will also include information about how much your creditors were paid during the IVA, and how much they are still owed.
Your IP will also inform your creditors that the IVA has ended. You will not have to pay any IP fees, however – since these are included in your monthly payments with an IVA, your IP has already been paid for the work they did administering the IVA thus far.
When an IVA fails, your creditors are owed the total remaining balance of your debts. They will be free to contact you again, and are also able to make you bankrupt. Your IP also has the power to make you bankrupt in this instance. Although bankruptcy is usually seen as a last resort for problem debt, it can be a relatively quick way to get a fresh financial start. If you do not own property, and have assets of fairly low value, bankruptcy could be the best solution under these circumstances.
What to do if an IVA fails
To avoid your creditors asking the court to make you bankrupt, it is important to get in touch with them as soon as possible after your IVA has failed. It is possible to renegotiate a payment plan with them directly. Alternatively, you could consider another debt solution:
- Enter a Debt Management Plan
Debt Management Plans (DMPs), like IVAs, are a debt solution which involves negotiating a reduced payment plan with your creditors. Unlike IVAs, though, DMPs are an informal solution. This means that your creditors can still contact you during one, you will be required to pay all of what you owe, and there are no set guidelines on how long the plan can last for.
Creditors may agree to freeze interest and fees on your debts to make repaying them easier, but they are not obliged to. Entering into a DMP if your IVA fails could be a good way to avoid bankruptcy. You can either negotiate the repayment plan with creditors yourself, through a debt charity, or by seeking the services of a private firm. The latter will charge you for setting up and administering the DMP.
- Debt Relief Order
A Debt Relief Order (DRO) is a low-cost alternative to bankruptcy. If you do not own a home or many assets, have a low income, and your debts are less than £20,000, you could be eligible for a DRO. When a DRO is granted, you are discharged from all of your unsecured debts for 12 months. During this time, you pay nothing towards them.
At the end of these 12 months, if your financial circumstances have not improved, all debts included in the DRO are written off. It costs £90 to apply for a DRO, and before you can do so you must seek advice from a DRO advisor. Most branches of Citizens Advice host an advisor you can speak to.
In some cases, bankruptcy can be the best solution. Applying for bankruptcy yourself costs £680, and you should seek advice from a debt expert before you do so. The process of bankruptcy usually lasts a year, but you may also be required to make monthly payments towards your debts, depending on your personal circumstances.
These payments would be entirely based on what you could afford. If your bankruptcy is granted, you are assigned an Official Receiver, whose job it is to choose how any assets you have should be best used to repay creditors. If you are a homeowner you may wish to avoid bankruptcy, as it puts your home at risk of being sold. At the end of the bankruptcy process, your unsecured debts are written off.Check if you qualify for an IVA
A failed IVA can be extremely stressful, but even if this does happen you will not be on your own.
To receive confidential advice about whether an IVA could be right for you, speak to a friendly Creditfix advisor by calling 0808 2085 198.