Can I keep my Bank account in an IVA?
A current account is like a best friend of long standing, someone you have known for a long time, whom you trust, who is reliable and dependable, who doesn’t let you down and who knows all your (financial) secrets.
Like a good friend your current account gives even when there is nothing left to give i.e. when you are overdrawn. Sometimes you make unreasonable demands on it like exceeding your authorized credit limit. If your current account could talk it would have a real 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 find yourself in financial difficulty and are considering entering into an Individual Voluntary Arrangement (IVA), 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 although it may be in credit at times such as when your wages, salary or other income is paid into it. However, if you are like the majority of ordinary people in these recessionary times, your current account will usually be overdrawn, often up to and sometimes over your authorized credit limit. In any case the balance of your current account is likely to fluctuate somewhere between your overdraft limit and a small credit balance. As soon as your bank becomes aware that you are considering entering into an IVA, it is likely to freeze all current account transactions (apart from lodgments, obviously).
This could be a disaster for you particularly since your account might be in a reasonably healthy state comparatively speaking. For example, your salary may have just been paid into it and suddenly you cannot access cash from the hole in the wall. On top of that, direct debits 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 might cease to be executed by your bank. This is particularly so if you have other credit accounts with the same bank – such as personal loans or credit cards.
When 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 will usually be allowed to have a current account. 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 or at best a very small one. For example, 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 for non-priority debts (such as personal loans, credit card accounts, store card accounts and other unsecured liabilities) on your old account are stopped. You will cease making payments on all of 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, provided that your existing current account is not overdrawn and that you have no other liabilities to that lender you may retain that current account, although you will be obliged to remove any overdraft facility that applied to it. However, people often prefer to open a new account rather than have to try to explain matters to their old bank with whose staff they may have longstanding and close personal relationships. Your IP will be able to suggest alternative banks or building societies which are not associated with your existing current account provider and with whom you have no other liabilities. Indeed even if you are not insolvent now but fear that you may become so at 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.