IVA and Debt Consolidation Benefits and Drawbacks Explained

Monday, December 10, 2007

An Individual Voluntary Agreement (IVA) provides debt relief just like a debt consolidation or negotiation process. However, the way it provides it and the consequences of such relief are quite different. Thus, it is important for the debtor to know what he or she is facing when deciding which path to take. Either solution will provide the desired results but one of them may be more suitable for a particular applicant than the other.

The first step towards this understanding is to define both concepts. IVA and Debt consolidation are two different things and as such, need to be understood through different points of view: While IVA is not only a financial term but also a legal term, debt consolidation is only a financial concept with many different processes included in the concept like debt negotiation, debt settlement, consolidation loan, etc.

Individual Voluntary Agreement (IVA)
IVA is a legal agreement between a debtor and the creditors that can cut up to 75% of all unsecured debt thus providing great relief for the debtor. The agreement is legally binding and thus, the creditors and the debtor are obliged and ruled by it. This provides a lot of certainty for both parties and is the main reason why creditors agree to such a high debt reduction.

Debt Consolidation or Negotiation Process
Debt negotiations and consolidation are processes that do not legally oblige the different actors. Instead, they are commercial agreements or complex processes that include partial payments, reprogramming of the repayment schedules, smaller debt cuts, interest rate reductions, obtaining new loans to cancel old ones, etc. Though you cannot obtain so important reductions as with IVAs, under certain situations debt consolidation agencies obtain overall debt reductions of up to 60% and more.

Comparison and Advantages
The main difference between these two procedures is the nature: while IVA is a legal procedure where lawyers and court measures are involved, debt consolidation or negotiation does not necessarily include legal measures or even the intervention of lawyers at all. With IVA all legal collection procedures are halted and terminated if successful while with debt consolidation that is subject to negotiation too.

The amount of debt that can be eliminated with an IVA is significantly high. The average debt reduction ranges from 65% to 70% while with debt consolidation, though rates of 65% have been achieved, the negotiations usually end up with lower rates and sometimes there are no debt cuts but reprogramming of the repayment schedules only.

Another important issue is the implications that each procedure has on your credit score and history. Though debt consolidation and negotiation may occasionally and temporarily reduce your credit score at the beginning of the process, it will eventually recover and help you regain your credit. IVA will damage your credit score severely and will remain on your credit history for a long period of time (usually more than 5 years).

Thus, your access to new credit sources will be limited for some time. So, if you plan to take a mortgage loan or high amount personal loan in the future, we do not recommend IVA unless there is no other option.

Source: http://www.americanchronicle.com/