Your debt payments will reduce if you start an IVA. You get immediate relief from your creditors.
- What happens to your debt payments in an IVA?
- When do you stop paying your debts?
- What should you say to your creditors?
- How is your credit rating affected?
What happens to your Debt Payments if you start an IVA?
An IVA allows you stop making debt payments to your unsecured creditors (as long as they are included in the Arrangement). Instead you make a single payment based on the amount you can afford.
You will normally pay back less than the amount you owe. In other words when your creditors accept the Arrangement they agree to write off a certain amount of your debt.
The amount of debt written off is not fixed. It depends on the amount you can afford to pay into the arrangement. In addition if you own a home you may have to release equity to increase the return to your creditors.
Only unsecured debts are included in an IVA. You must continue pay any secured debts such as your mortgage or car finance. These are not written off.
When do you stop paying your Debts?
Ideally you should continue making your unsecured debt payments until your IVA is Accepted. However this may not be possible.
If you are struggling you can stop paying your debts as soon as you start the application process. This is acceptable because the only way you could carry on would be to use credit which you should not do.
You may feel that you have sufficient funds to pay some of your debts but not others. In this situation you should not treat any of them preferentially. The best way to do this is to stop paying them all.
If you have a CCJ (County Court Judgment) or an agreement to pay rent arrears you should continue to pay these if possible. If you are a home owner non payment of a CCJ could put your property at risk.
What to say to your creditors when you stop your Debt Payments
As soon as you stop your debt payments your creditors may start collection activities against you. However handled in the right way this should not be anything to be concerned about.
Do not ignore your creditors. If they contact you do not be afraid to tell them that you are struggling financially. Explain that you have taken debt advice and are applying for an IVA.
Ask the creditors to put your account on hold to give you time to get your payment proposal to them. Most will be willing to help and suspend their collection activities.
If your creditors refuse to suspend their collection activities do not worry. Most actions taken against you at this stage will be overturned by your IVA.
How is your Credit Rating affected if you stop your Debt Payments?
If you stop your debt payments your credit rating will be affected. Your creditors are likely to record the missed payments on your credit file and even issue a Default Notice against you.
However if you are struggling with debt you will eventually miss payments anyway. This will also affect your credit rating. As such stopping your payments before starting an IVA is unlikely to make things worse overall.
Once your IVA is in place a record will be added to your credit file. It will remain there for 6 years and mean that you are prevented from getting most forms of credit during this time.
If your creditors do not accept your IVA and you have already stopped your debt payments your credit rating is likely to be worse. However this would happen anyway if you are struggling financially.