An IVA is only available to residents in England, Wales and NI
An Individual Voluntary Arrangement (IVA) can be a great way to help you manage your unsecured debt and make more affordable monthly payments. However, there are certain restrictions to be aware of when deciding if an IVA is the right option for you.
When entering into an IVA, the individual agrees to follow a strict set of rules regarding spending: no large purchases or investments, no holidays or luxury items, and restricted access to credit. This is all in order to ensure that agreed-upon payments are made on time and that the debt will eventually be cleared within the given timeframe.
In addition, individuals must agree to regular meetings with insolvency practitioners which involve full disclosure pertaining to their finances. It’s important to acknowledge these restrictions when considering an IVA as they may prove overly restrictive for some households.
Those who do choose this route should get familiar with budgeting techniques that allow them to maximize their income while still meeting their obligations under the terms of the arrangement. It is also important to keep communication open between all parties involved so that adjustments can be made if needed and any potential problems can be addressed quickly and efficiently.
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How does an IVA work?
An IVA is a formal debt solution between you and your creditors to repay what you owe through a series of monthly payments or, if your financial situation allows, a single lump sum payment.
Unlike other debt solutions, IVAs can only be set up and managed by an Insolvency Practitioner (IP) who will manage all aspects of your arrangement and communicate with your creditors on your behalf.
Because a typical IVA term lasts five years and your monthly IVA payment amount is based on what you can comfortably afford, most debtors also end up repaying less than what they owe with the remaining balance cleared when the IVA ends.
However, whilst an IVA will usually last no longer than five years, it will stay on your credit record for a total of six years from the date it was approved which can have a negative impact on your credit score and affect your ability to get further credit.
If you do qualify for an IVA you can stop pressure from the people you owe money to, reduce monthly payments, and write off up to 81% of unsecured debt
What spending restrictions do I need to stick to during an IVA?
When your creditors are writing up the terms of your arrangement, they will adhere to a specific set of spending rules to determine how much you can spend on essential and non-essential expenses during your IVA.
It may sound harsh but the spending restrictions are put in place to help you budget for future expenses and, more importantly, ensure your IVA is successful. Here is a rough guide to the rules you will face when you enter into an IVA:
Applying for further credit
Whilst there are no rules prohibiting you from applying for credit during your IVA agreement if you need to do so, there are limits to the amount you can borrow.
For example, you are free to borrow money up to £500 but you must seek permission from your IP if you want to borrow more than that amount. Your IP will then analyse your finances and advise you whether or not you can take out further credit.
However, even if your IP agrees to you applying for further credit, it will cause further damage to your already low credit score and the likelihood of a lender accepting your application is very low.
If you are struggling to afford your monthly IVA payments, your IP may be able to pause your arrangement for a set period of time in what is known as a payment holiday or payment break.
Accepting a windfall clause
If you receive an unexpected sum of money during your IVA (known as a windfall), you must inform your IP and pay a percentage of the total amount into your arrangement. This could include anything from winning the lottery, receiving an inheritance or getting a significant bonus at work.
If you accept the windfall but fail to inform your IP of your change of circumstances, you risk breaking the terms of your arrangement and your IVA may fail as a result. When this happens, you will need to find another way to repay the debt you owe which can be more expensive as well as more damaging to your credit.
When you experience a change in your financial circumstances during your IVA, you may also be required to send copies of your recent bank statements as proof.
Banking and savings
When you have an IVA, you may not be able to keep keep your current bank account.
This is because, if you owe your bank money and the debt is set to be included in your IVA, there is a possibility that money will be taken automatically without your prior consent under a perfectly legal practice known as the ‘right to set-off’.
As a result, most people prefer to open different bank accounts with completely different banks when they enter into an IVA.
Budgeting for day-to-day expenses
With an IVA, you must be able to prove to your creditors that you are living within your means and not spending more than is necessary.
Before you start making payments, your IP can help you assess your finances and come up with a realistic budget that you can easily stick to both during and after your arrangement.
Can I save during an IVA?
Whilst saving money may not be your main priority during an IVA, there is nothing to stop you from putting some money aside to help with daily expenses when you leave your arrangement.
However, because creditors prefer that any spare income goes towards your IVA, any money going into your savings account must come from your allocated budget for living expenses. This can be done by cutting down on your usual food bill or reducing your travel costs but your IP must be informed if you plan to do this to allow you to maintain an open and honest relationship.
Furthermore, your creditors will outline how much additional income you earn can be kept and how much must be paid towards your IVA. This is known as an Additional Income Threshold and is typically 10% higher than the monthly income stated on your IVA proposal.
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Can I go on holiday during an IVA?
In the same way that there is nothing stopping you from putting some extra money aside during an IVA, there are no rules against going on holiday during an IVA.
However, due to strict spending restrictions, the money may also have to come from your allocated budget for living expenses or be covered by a friend or family member.
Most financial experts warn against spending more than is necessary for the duration of your arrangement and waiting until you have been declared debt-free before splashing out on large or luxury expenses.
