Television and newspaper adverts are increasingly telling people how easy it is to wipe your debt off and start again. However are people being shown the full picture when considering an individual voluntary arrangements (IVA) or bankruptcy?
The television commercials may make it look like there are easy ways to escape your debts. But the truth is far harsher. Those who assume that bankruptcy or an IVA offer a painless exit from spiralling debts could be in for a rude awakening
At PCCU we occasionally come into contact with members of community who have chosen to go down the various routes to wipe their debts but have not always been aware of the consequences that are attached. Some limiting restriction only affect people whilst in the process; however there are side effects that impact on a person ability to borrow in the future or even on household status.
As a Credit Union we encourage any saver or borrower who has an account with PCCU and feels they are struggling to cope with their debt to get in contact as soon as possible. Any responsible lender should attempt to work with a borrower.
Bankruptcy and IVAs should be seen as a last resort and in many cases may not be necessary. Contacting creditors to arrange informal arrangements to reduce debt within a person’s budget could be a far better solution.
If you have extreme debts, a formal debt solution – bankruptcy, individual voluntary arrangement or debt relief order may be the only way back. It’s not a step to be taken lightly, and you should ALWAYS seek debt advice first.
Martin Lewis, Money Saving Expert
The world is awash with companies who promote the idea that they are helping people when clearing debt but many have financial motives at heart. There are a number of independent and free advice services available, we looked to StepChange for some of the negative impact on entering an IVA or bankruptcy.
What do an IVA and bankruptcy have in common?
There are a few things that an IVA and bankruptcy have in common, regardless of which one you go ahead with. They would both:
- Be recorded on your credit file for six years from the date they begin. While this information is on your credit file you may find it difficult to take out any further credit.
- Mean your name is entered on the Individual Insolvency Register. This is an online database of everyone who’s gone bankrupt or been in an IVA or debt relief order.
Will bankruptcy or an IVA affect my job?
Some jobs might be affected if you’re on an IVA or go bankrupt.
The best way to find out if an IVA or bankruptcy would impact on your job is to check with your professional membership body or trade union, or ask to speak to your HR department confidentially.
Bankruptcy is more likely to affect your job than an IVA, and in both cases it’s more likely to cause a problem if you work at a senior level.
How will an IVA or bankruptcy affect my home?
IVAs and bankruptcy will have different effects on your home, and this will depend on whether you rent or own it.
If you rent your home during an IVA: If you rent your home, an IVA should have no effect and it’s very unlikely you’d need to move.
If your rent your home and go bankrupt: If you go bankrupt you can usually stay in the same property if your rent is up to date.
However, some private landlords include a condition in the tenancy agreement which means you could be asked to leave if you go bankrupt, You could also lose your home if you have rent arrears when you go bankrupt.
If you own your home during an IVA: You won’t be forced to sell your home but you might be asked to remortgage it six months before the end of your IVA. You’ll only have to remortgage if it’s affordable, and if you can’t, you might have to either pay an extra 12 months of payments into the IVA, or raise money from a third party instead.
If you own your home and go bankrupt: If you’ve got equity in your house it’s very likely that the official receiver (who deals with your bankruptcy) will make you sell it. If there isn’t any equity in it, you may be able to keep it.
Owning a car during bankruptcy or an IVA
- If you apply for an IVA you’ll normally be able to keep your car (or van, or motorbike) as long as it’s a moderately priced make and model.
- If you apply for bankruptcy the official receiver will expect you to sell your car (or van, or motorbike) unless it’s essential (for example, you couldn’t get work without it) and it’s got a low value.
Many people are surprised when they finish an IVA or come out of a bankruptcy order that they still struggle to obtain credit and have a poor credit rating. It can be difficult to obtain a mobile phone contract, let alone a bank account or mortgage.
As a Credit Union we encourage you to contact your creditors and try to agree a solution within your budget before going down a route that could affect you for many years to come.