Bankruptcy has many different connotations. On the one hand it’s seen as a sign of financial ruin. This is grounded in fact. After all, when a person goes bankrupt, their credit will be in shambles for at least 7 years and in some cases they won’t even be free of their debt. From another vantage point, bankruptcy can seem like freedom. Sure it wrecks your credit, but so does mounting debt. With bankruptcy, an individual might find themselves free of some or all of that debt. In this case bankruptcy might not be the destination you dreamed of, but it’s one that’s much preferable to out of control debt.
Bankruptcy may be the right choice for some people in certain situations. But it’s important to know that it’s not the only choice. For many, an Individual Voluntary Agreement will be much preferable to the confines and limitations of bankruptcy.
So what is an IVA anyway? An IVA is a way of nipping out-of-control debt in the bud. It doesn’t fully absolve a consumer of the responsibility of their own debt, but it is designed to make this debt much more manageable.
An Individual Voluntary Agreement is reached with the help of a third party acting as intermediary between consumer and lender. The IVA will only focus on unsecured loans. Each of these unsecured loans will be consolidated into a bundle for which there will be one single monthly payment paid by the debtholder.
The monthly payment must be paid consistently for a term of (usually) five years. At the end of this time, all of the attached debts will be voided, and the consumer can move on with their life.
During the period of the IVA, no interest or fees associated with the debts before agreement will be recognized, and no more can be issued. The consumer is, truly, insulated from the worst gales of their own debt storm.
If you know anything about bankruptcy, you can immediately see how this sort of agreement might be a better alternative. With bankruptcy, you might still be tied to some of the debts you had before you filed. Bankruptcy is also something of a scarlet letter, at least as far as your personal credit history is concerned.
For a period of 7 years, your bankruptcy will stay on your credit report, which will drag your credit score through the muck. A bad credit score will make it difficult or impossible to get a loan, buy a house, or get a credit card. Of course, this might be a healthy limitation during a time when you’re rebuilding your financial life, but it is also highly restrictive.
An IVA is only active for 5 years. And though previous financial transgressions will remain on your credit report, they will not have the negative impact of bankruptcy. If you simply focus on maintaining your monthly payments, you will set yourself up for credit recovery much sooner than you would be able to achieve with bankruptcy. If you find yourself on the verge of financial ruination because of debt, talk to a financial adviser about an IVA.