A current account is like a best friend of long standing, someone you have known for a long time and trust to help you. It is reliable and dependable. Sometimes you make demands on it that are bordering on unreasonable but it never lets you down.
Like a good friend it gives even when there is nothing left to give. It knows all your (financial) secrets. If it could talk it would have some story to tell. Your ups and downs for many years are chronicled in its records and you have confided in it to an extent that you couldn’t or wouldn’t confide in a human best friend.
It comes as a bit of a shock then that if you are in financial trouble and are considering entering into an Individual Voluntary Arrangement (IVA) that you may have to say goodbye to your old friend. The problem is the overdraft facility. If you are insolvent – as you need to be to enter into an IVA – all of your debts have to be entered into the arrangement. Chances are that your current account is overdrawn at any given time. It may be in the black at times when your wages, salary or other income is paid into it but if you are like the majority of people in these recessionary times, its usual colour is an embarrassing red. In any case the balance of your current account is likely to fluctuate somewhere between your overdraft limit and a small credit balance. Your bank is likely to freeze all transactions on the current account as soon as it becomes aware that you are planning to or even just considering entering into an IVA.
This could be a disaster for you. Your account might be in a reasonably healthy state comparatively speaking for example when your salary has just been paid into it and suddenly you cannot access cash from the hole in the wall. Direct debit mandates for your mortgage or rent, vehicle HP, utilities such as water, gas and electricity, TV license, house and car insurance, life assurance, council tax, Sky and so on cease to be executed by your bank.
If you enter into an IVA, you will have to stop using all forms of credit except with the express permission of the Insolvency Practitioner (IP) supervising the IVA. If your IVA is approved by your creditors, you will be expected to cut up any credit cards or store cards you may have. Furthermore, you will not be permitted to obtain any new credit cards or store cards during the term of your IVA, which is frequently of five years duration. Breaching this requirement will almost certainly lead to the failure of your IVA.
The one exception is that you may have a current account and the usual practice is that before you proceed with your IVA, your IP is likely to advise you to open a brand new current account with a bank (or other financial institution) with which you have no liabilities. The new account will normally have no overdraft facility. However, with the express permission of your IP, a nominal overdraft facility of perhaps up to £100 may be permitted. Your IP may require that the new account be restricted in other ways relating to the use of checking or debit card facilities. Having opened the new account you must arrange to have your salary (or other income) paid directly into it. You must also ensure that direct debits mandates for your priority debts such as your mortgage, car HP and utilities are set up on the new account and that all your old direct debits mandates and standing order instructions on your old account are stopped. You will cease making payments on your unsecured debts other than your priority debts. The timing of these activities is important and it probably should be done well in advance of the circulation of your IVA proposals.
Of course, if your existing current account is not overdrawn and you have no other liabilities to that service provider you may retain that current account, provided that any overdraft facility is removed. However, people often prefer to open a new account rather than have to try to explain matters to their old bank. Your IP will be able to suggest alternative service providers who are not associated with your existing current account provider. Indeed even if you are not insolvent now but fear that you may become so some time in the future, you might consider opening and maintaining a clean current account now, given the potential difficulty in doing so when your credit file begins to be impaired.