Due to the pandemic, many in the armed forces have seen family members facing unemployment, drops in household income, or unplanned expenses. For some people, this has meant taking on additional debt. In some cases, this debt has reached levels that can feel overwhelming or impossible to pay off.
If that describes you, then we should start by being clear: you have options. Since the start of COVID-19, banks and other lenders have had to provide reasonable support to help you manage your debts. London Mutual is no different. You can find out more about how we can help here.
Another approach to dealing with debt that is growing in prominence are Individual Voluntary Arrangements (IVAs). These are sometimes advertised to members of the armed forces as an easy fix or a simple way out of debt.
While this can seem appealing, entering an IVA can have an impact on your finances and career prospects in the armed forces. Because of that, it’s worth thinking carefully before entering one and discussing it with your padre and/or chain of command first.
What is an IVA?
An Individual Voluntary Arrangement (IVA) is a form of debt management. If you owe money and enter an IVA, your debts are frozen. The IVA lasts a fixed period (usually 5-6 years). During that time you commit to paying a fixed amount each month towards your debt. Once the IVA is over, any money you still owe is cancelled. The agreement is binding in law, so once you enter an IVA, neither you nor your creditors can back out.
An IVA needs to be arranged for you by a professional insolvency practitioner. Many are professionally-run, and committed to helping people out of debt. Unfortunately, though, some are less reputable. We’re seeing examples of practitioners aggressively advertising IVAs within the Forces community as an ‘easy’ solution to debt, or a way of having debts ‘written-off’ for good.
You may sometimes see these types of adverts on daytime or late night TV, online forums or on armed forces Facebook Groups. It’s no coincidence that these tend to be places where they know they are likely to reach armed forces personnel in debt or who are in vulnerable situations.
Problems With IVAs
On the surface of it, going into an IVA can seem like a straightforward solution, and a way of getting rid of debts hanging over you for good. But, it’s not a decision that you should take lightly.
Worryingly, we have seen cases where members of the armed forces have been encouraged into IVAs by over-eager insolvency practitioners as a first, rather than last, resort. Sometimes, the drawbacks or long-term consequences haven’t been fully explained. This can mean an unpleasant shock later for service personnel entering one.
Going down this route can have a long-term impact for your financial independence and ability to borrow in future. Depending on your role in the Armed Forces or future career plans, it can also limit your career options or even cost you your job.
IVAs can be expensive because insolvency practitioners (especially those who operate for a profit) charge fees to set one up. The money you will repay each month will cover both these fees and part of the money you owe. This can mean that the insolvency practitioner, rather than those you owe money to, is likely to up getting the majority of the money you pay back.
Being in an IVA also means giving up some of your financial independence. If you own expensive items like a car, you may have to sell it as a condition of the IVA. In some cases, if you are a homeowner, you may also be expected to re-mortgage your home. If you receive some money you weren’t expecting (such as inheritance or gift), you may also be required to hand all or some of it over towards the debt you owe. The same applies to the pension ‘lump sum’ that some people are able to withdraw when they turn 55.
Ability to Borrow in Future
If you are in an IVA, there are legal restrictions on your ability to borrow further. Usually you’ll need written permission from your insolvency practitioner to do so. This along with the fact that the IVA is on your credit file, means that it will often be hard to borrow. You are likely to be ineligible for even ‘basic’ borrowing such as a mobile phone contract, credit cards and overdrafts.
A record of your IVA will go onto your credit file. This stays for at least six years after the IVA has ended. Given that the IVA itself can last for up to six years, that could be as much as 12 year away. This creates particular problems if you are hoping to get a mortgage to buy a home in the future.
Career & Security Clearance
As a serving member of the UK armed forces, you are required to disclose an IVA to your chain of command. If you are considering this route, you should notify them before doing so, so that you have the opportunity to understand the possible impact on your career and prospects of promotion.
Like many employers, the armed forces consider an IVA as a sign that you are in severe financial difficulty. Your chain of command may view this as negatively impacting trust or performance, or feel that it calls into question standards of personal conduct. For British Army personnel, these expectations are set out in the Values and Standards of the British Army
More sensitive roles within the UK armed forces require an additional level of security vetting. This process typically includes a full financial background check. Issues like a previous bankruptcy or IVA make it more likely that you will be unable to secure the level of clearance you need to secure promotion or to do your job.
Alternatives to Entering an IVA
Sometimes, despite all the drawbacks, an IVA is genuinely the best way forward. But if you are considering this route, you should do your homework first. At minimum, look for a not-for-profit insolvency practitioner. They are more likely to be honest with you about the consequences, charge reasonable fees, and treat you with respect.
Unfortunately, on a regular basis we see members who have jumped into IVAs as a first option. Based on their income and financial circumstances, other, better options might have been available. Often these alternatives come without the long-term financial constraints or credit or career harm that come with an IVA. Because of that, it’s worth considering them first.
Speaking to your Creditors Directly
Banks and credit card companies don’t take it personally if you fall behind. Increasingly, they recognise that it’s in everybody’s interests to try and come up with a solution if you are in difficulty. Try contacting them directly. Explain your circumstances, and provide evidence where you can. Often, they will be able to propose solutions such as a payment plan, a payment holiday, re-scheduling the loan, or even writing some of it off. It’s always better to engage as early as possible.
Work out if repaying is genuinely unaffordable
It’s worth being clear in your own mind whether the debts you owe are actually impossible to pay off or, if, with changes to your finances or lifestyle, it might be doable. Downsizing, moving home, or selling an asset like a car may seem like drastic steps. But it does deal with the problem immediately. It means you can get on with life and rebuild, without the long-term consequences of an IVA hanging over you.
Other Legal Routes
If you do decide that a formal legal route might be the best way forward, it’s worth getting some independent impartial advice. This beats going straight to an insolvency practitioner who may be motivated by the fees they will earn from setting up your IVA. You can find a list of independent not-for-profit organisations on our Money Gym page. They will also be able to advise on alternatives to IVAs such as debt relief plans (DRP) or debt management orders (DMO).
Debt Consolidation Loans
If the amount you owe is fairly small and you have a regular income with money left over each month, a debt consolidation loan could be an option. These are often a good way to make it less daunting to pay everything off. This type of loan combines your debts into one single monthly repayment, with a fixed end date.
Typically, the APR will be lower than you were paying before, so you will often end up saving on interest too. At London Mutual Credit Union, we offer consolidation loans up to £7,500. But please bear in mind that due to the risk involved in making these types of loans, we may not be able to offer them to everyone