IVA loopholes – do they really exist?

Thinking about an IVA? Here’s the truth about potential loopholes and why trying to bend the rules may not work for most people.

An Individual Voluntary Arrangement (IVA) can be a helpful way for people to manage their debts.

An IVA is a legal agreement between you and your creditors to pay back your debts over a set period, usually five years.

But some people wonder if there are ways to “game the system” or find loopholes in an IVA.

What is an IVA?

An IVA is a formal, legally binding agreement between you and your creditors. It allows you to pay off your debts at an affordable rate by making monthly payments over a fixed period.

Once the IVA is completed, any remaining debt is usually written off.

This can be a lifeline for those struggling with debt, providing a structured way to get back on track.

Are there loopholes in an IVA?

The idea of finding loopholes in an IVA might sound tempting, but it’s important to understand that an IVA is a legal process with strict rules and regulations.

Trying to exploit and bend the rules can lead to serious consequences.

Who’ll even know?

Rumour: Cheat the system because no one is really checking.

Reality: IVAs are managed by licensed insolvency practitioners. They monitor your financial situation throughout the IVA period. If they discover any discrepancies or dishonesty, they can terminate the agreement.

Income changes

Rumour: Made some additional money? Keep any extra income without reporting it.

Reality: If your income increases during the IVA, you’re required to inform your insolvency practitioner. This might lead to higher monthly payments. Trying to hide additional income can lead to the failure of your IVA.

Underreporting income

Rumour: Don’t share all of your income so it will lower the monthly IVA payments.

Reality: Your income will be reviewed regularly during the IVA period. Hiding assets or income can be considered fraud. If you’re found to be dishonest, your IVA could fail, and you might face legal action.

Increasing expenses

Rumour: Inflating household expenses can reduce the amount you have to pay into the IVA each month.

Reality: Insolvency practitioners analyse your budget carefully. They will challenge unreasonable expenses, which could risk your IVA.

Getting a new loan

Rumour: Borrow more money during an IVA to manage extra expenses or hidden debts without telling anyone.

Reality: Taking out a loan or credit card over £500 without asking permission from your insolvency practitioner can breach your IVA terms. This can lead to the failure of the IVA, increased debt, and serious financial repercussions. It’s essential to discuss any need for additional credit with your practitioner to avoid negative outcomes.

Transferring assets to family or friends

Rumour: Move your assets into someone else’s name before entering an IVA to keep them safe.

Reality: Such transfers can be reversed if they are deemed to be an attempt to defraud creditors. This is known as a “clawback” action.

Getting rid of assets

Rumour: Sell your assets and don’t declare the proceeds.

Reality: Selling assets and not declaring the proceeds can also get you into trouble. Any significant financial changes must be reported to your insolvency practitioner.

Hiding assets abroad

Rumour: Move assets to another country to keep them out of the reach of the IVA.

Reality: Insolvency practitioners are skilled at uncovering hidden assets, and attempting to hide assets abroad can lead to severe legal consequences, including the failure of the IVA and possible criminal charges.

Common misconceptions about IVAs

You cannot write off all of your debts.

While an IVA can write off a portion of your debt, it doesn’t mean you can escape paying your debts entirely. You still have to make regular payments based on what you can afford.

It’s not guaranteed that you’ll be accepted. Not everyone is eligible for an IVA. Your financial situation will be assessed to see if an IVA is right.

It won’t be an immediate fix, and your finances won’t get better straight away.

It will also affect your credit score and will stay on your credit report for six years from the start date. This means it can impact your ability to get credit in the future.

See: Best free to use credit score apps

The right way to handle an IVA

If you’ve looked into alternatives (see below) and an IVA is the best route for you, be sure you’re honest and transparent and give all necessary information about your finances when setting up the IVA.

It’s important to update your insolvency practitioner on any changes in your financial situation.

Always stick to the agreed payment plan and make your payments on time, but communicate with them straight away if you’re having issues.

Alternatives to IVAs

If you’re not sure an IVA is right for you, there are other options to consider:

• Debt Management Plan (DMP): An informal agreement with your creditors to pay off your debts. It’s not legally binding and can be more flexible.
• Debt Relief Order (DRO): For those with debts and little disposable income, a DRO can freeze your debts for a year, after which they may be written off. A DRO used to be for people with lower debts, but you can now have up to £50,000 of debts cleared and it’s free to apply.
• Bankruptcy: This is a more drastic option but can provide a fresh start. However, it has serious implications and should be considered carefully.

Conclusion

The idea of finding loopholes in an IVA might be appealing, but it’s not worth the risk.

Being honest and following the rules is the best way to manage your debts and get back on track.

If you’re considering an IVA, speak to a free debt advisor or charity such as StepChange, National Debtline or Citizens Advice, who can guide you through the process and help you find the best solution for your situation.