A reader asked about a friend who is looking at an Individual Voluntary Arrangement (IVA):
Mr X is 23 and owes just over 10k on various credit cards and loans. He earns £20k and hopes to get a £10k bonus this year. The IVA firm says the bonus doesn’t matter as it’s not guaranteed. But won’t the IVA take half of it? Would it be better if he got a job with a larger basic salary and no bonus, or would they just take more of that?
Let’s start by looking at the facts about how bonuses, overtime and payrises affect an IVA.
That leads to more questions – is an IVA really a good option for Mr X? And has Mr X had proper debt advice?
Contents
Bonuses, commission and overtime in an IVA
If a bonus isn’t guaranteed, it isn’t taken into account when your IVA monthly payment is set. But you then have to pay in more when you do get a bonus.
IVAs don’t always have the same clauses – that is why they are called “individual”. But the large majority of IVAs use very similar terms for bonuses. Here is the clause from the 2021 IVA protocol:
you must report any overtime, bonus, commission or similar to the supervisor if this is not included in your original calculation and the amount exceeds 10% of your normal take home pay. Disclosure to the supervisor must be made within 14 days of receipt and 50% of the additional amount (over and above the 10% referred to above) shall be paid to the supervisor within 14 days of the disclosure.
So the reader was roughly right when he said that half of any bonus has to be paid into the IVA.
Not telling your IVA firm is a breach of your IVA contract and it may fail. If you have just forgotten and spent the money, the IVA firm may extend your IVA for more months so the extra can be paid. This may make your 5 or 6 year IVA much longer.
Pay rises in an IVA
If you get a large pay increase, your monthly IVA payments are likely to go up for the rest of your IVA.
How much of your extra income you have to pay to the IVA depends on your IVA terms, but a half has been common and from August 2021 new IVAs that use the standard protocol will say:
You will be required to increase your monthly contribution by 50% of any increase in disposable income one month following [your annual review].
So it makes little difference to what you pay into the IVA if you get a regular bonus each year or your pay goes up by that amount.
It is the increase in your disposable income that matters. A small pay increase “for the cost of living” would often be ignored.
And you may have extra larger costs. Perhaps you have a new job where your commute is more expensive or your hours are different so you have to pay more in child care. All these should be taken into account when calculating how much more money you really have because of the pay increase.
Your IVA won’t end earlier if you pay more
A lot of people go into an IVA thinking that the numbers they have been told at the start are fixed.
For example, if your proposed IVA says you have to pay £120 a month for 5 years, that would mean you pay £7,200 in total over 5 years.
You may think if you pay an extra £1,200 into your IVA because of you have been doing overtime, then you will get to the “£7,200 paid in” point 10 months sooner, so your IVA will end earlier.
That is wrong.
Your IVA will only end early if you have repaid all your debts in full plus the IVA firm’s fees. As a very rough rule of thumb, the IVA fees are likely to be £3,500 or more.
(For IVA starting before 1 August 2021, some people will also have to pay 8% interest per annum on the debt total as well.)
Most people who pay more don’t repay all their debts plus the IVA fees. So for them the extra money just goes into the IVA. The IVA doesn’t finish sooner. And paying in these extra amounts doesn’t mean you pay less later on.
But Mr X doesn’t need an IVA at all!
Mr X’s bonuses are expected to be very large compared to his debts, so if he starts an IVA he will be one of the few people who does pay it all off early.
But even when an IVA is completed early, it still stays on your credit record for 6 years. So for 6 years, Mr X would find it very hard to get a new private tenancy unless he has a guarantor. And very expensive to buy a car on finance.
And when the IVA has gone from his credit record he will still have to declare he had one on a mortgage application as an IVA is a form of insolvency, same as bankruptcy.
For a 23 year old, these are serious problems. If his debt was unmanageable and he had assets to protect, then an IVA would be worth it.
But an IVA has no advantages for him that seem worth paying the IVA fees for – he won’t actually get any debt written off at all.
His better options depend on whether he can afford the minimum monthly payments.
Snowballing if he can pay the monthly payments
If Mr X can afford the monthly payments, then his best option is “snowballing“. Here he carries on paying the normal monthly payments and when he gets a bonus he clear a large chunk of his most expensive debt. Then his monthly payments will drop, and his next year’s bonus should clear the rest of the debt.
He will have paid some interest this way – but it looks likely to be less than the IVA fees, He will also have avoid having insolvency on his credit record, which will end up looking good much sooner.
A Debt Management Plan (DMP) if he can’t
If the monthly payments are too large, then a DMP is a good way forward.
In a DMP, he could make one affordable payment each month. When he gets a large bonus, he can pay more in. Again his debt will be cleared in only a couple of years.
Interest is normally frozen in a DMP, but this isn’t guaranteed. But as with snowballing, any interest would be lower than the IVA fees.
A DMP does harm his credit record, but much less than having insolvency such as an IVA does.
Some firms charge fees for running a DMP. But StepChange don’t, so Mr X should talk to them.
It’s vital to get good advice about an IVA
So why didn’t the IVA firm explain to Mr X how much of his future bonuses he would have to pay in? And why didn’t they point out that he has a better option than an IVA?
It sounds as though they are only interested in the fees they will get from an IVA, not giving good debt advice.
Mr X didn’t need a form of insolvency at all – but good advice is just as important if you do have unmanageable debt.
Too many people are signed up to an IVA when they have no assets at all to protect and a Debt Relief Order or bankruptcy would have been more suitable.
So if you are thinking about an IVA, I suggest you talk to an adviser from a free-sector firm that doesn’t provide IVAs. Go to your local Citizens Advice or phone National Debtline on 0808 808 4000. They can explain the pros and cons of all your possible debt options. And if an IVA is right for you, they will suggest who to talk to.
Could a Debt Relief Order help you?
Choosing between an IVA and a DMP
Choosing between IVA and bankruptcy
Adrian says
I having being paying into an IVA fir a year to date, I have declared all my overtime each month , however I have just found out as a critical care worker I did not have to declare these payments over Covid . I have emailed my IVA supervisor of this, can I claim a refund of the additional payments I made into my IVA of overtime I earned .
Sara (Debt Camel) says
Yes I think you can. Or you could ask fir the next years payments to be reduced. Ask your supervisor why you were not informed if the COVID-19 provisions.
Adrian says
Thank you Sara for your prompt reply, I have paid at least and extra £1000 into my UVA from overtime I have had to work due to Excessive staff shortages . I have requested a refund for-the period in question , as I believe it has now stopped from 1st August 21. I have also asked them why was I not previously informed of the Covid 19 provision. I will update you on progress. Adrian
Kel says
I think I was mis sold my Iva 3 years ago , I was renting my debt was 10k and had no assets , I felt pressured into it and was also told to lie about my finances , at the time I was just grateful to get creditors off my back , I also was not explained about how an Iva works the fees etc, is there any way I can complain , at the moment I’ve stopped paying as I’m thinking about entering a DRO ?
Sara (Debt Camel) says
How much have you been paying a month?
Have you talked to a debt adviser about whether you will qualify NOW for a DRO? That is really important for you to know. If you haven’t, phone National Debtline tomorrow on 0808 808 4000.
Paul Humphries says
Hi
I am currently 3 payments away from finishing my 5 year IVA, Ive had 3 annual reviews and may payments havent increased as may wages have only increased 2/3 percent each year, it just so happens that my next pay day in a few days i have received a large pay rise 11 percent due to cost of living, and octobers pay will include backdated pay from june, do i need to tell my supervisor about this now or wait to my final review? as litrally only the the last 3 months of my IVA ive got this extra money, but with cost of living, it evens out
Sara (Debt Camel) says
I suggest you tell them now and also explain that because your expenses have gone up you are no better off.
Nicky says
Hi, my husband and i have been in an IVA for 4 years, 2 years to go! It is a noose around our necks, the harder we work the more they take. We are now paying £750 per month! Original debt was £29k
Im not sure why they made it 6 years, we have no assetts
Any advice, we are desperate to get out
Sara (Debt Camel) says
Are the current payments affordable?
Ella says
I currently pay £140( approx) per month on a debt settled by an IVA to the sum of £11239 I have approx £6000 left to pay but my new job will see me earn an extra £20,000 per year.
What happens to the extra £20k
Sara (Debt Camel) says
to the sum of £11239
do you mean that was the total of debts going into your IVA?
I have approx £6000 left to pay
so you are about 18 months into a 5 year IVA?
Travis says
I’m currently in an IVA as of March this year and paying £110 per month towards it which is manageable.
I work in the NHS as a HCA band 3 and my take home pay is variable but normally around £1750 per month which is what my IVA take home pay is set at.
I am due to receive the pay award that has been nationally agreed and I will receive £1714.
I’ll have to pay 50% of it to my IVA as obviously it will be more then 10% of my monthly income.
My question is, would it be better to get it paid in instalments m?, which would be £171.50 per month, and I think it would fall under the 10% extra that I’m allowed to earn. Thanks.
Sara (Debt Camel) says
I think it would be best to be sure by asking your IVA firm this.
Shaun says
My iva finished last year, I received £1000 bonus 3yrs into my iva but was unaware I had to declare this, so now the iva company say I have to pay this back, why do i have to pay the full bonus, which I can’t afford with the cost of everything going up so much in the last year or so, I’ve told them this, so the iva won’t be completed until this is paid,
Sara (Debt Camel) says
How large were your IVA payments at the end? Were these affordable?
Who is the IVA firm and did they do annual reviews?
Shaun says
Debt movement, which was previously aperture and jarvis before that, payments were £70 a month which were affordable, was just surprised to be told I had to pay £1000 from a £1000 bonus I’d received 4yrs earlier during the iva
Sara (Debt Camel) says
Did Aperture not do an annual review when you were asked about this?
Shaun says
This was only mentioned at the end of my iva, I was told to complete the iva this money needed paid, I have the email that says I earned considerably more money in 2022, badly worded as it wasn’t 2022 at all it was probs 3 years earlier, and wasn’t considerably more, was £1000 more, which they want in full, it’s like they are ripping vulnerable people off and making profit for themselves, I could pay the money, but they may come back and say you owe this also or something else, I’m a single person with a mortgage that has gone up a lot, I pay for 2 children through csa also, trying to maintain a house that’s falling apart, the £1000 could be used better, my IVA is already over 6 years, these companies think they can demand what they want, or let the IVA remain not finished, like in my case, if I have to pay the £1000 I will, just asking the question tbh
Sara (Debt Camel) says
They have the right to ask for this – another unfair thing about IVAs.
But if you cannot afford to make the payments, you can ask for your IVA to be completed on the basis of the funds paid to date.
Shaun says
I wasn’t sure if they could or not, I will pay it then hopefully that will get things moving as its dragged on too long as it is
Cori says
My IVA is due to end in September this year. My monthly payments have been £100 and I had a couple of payment breaks a few years ago which extended me until November. I asked to pay it off early (help from parents) and offered all remaining months owed up until November. Then said I can pay £200 in August and £200 in September as I had payment breaks this would mean I can finish early than expected providing I pay the extra amount I owed. I am due to receive a back payment of carer element and disability element on universal credit around £2000 worth after the last payment date of my IVA. Do I need to tell them? Or does my IVA obligations end after the final payment is made?
Sara (Debt Camel) says
I am due to receive a back payment of carer element and disability element on universal credit around £2000 worth after the last payment date of my IVA.
After the last days you are paying in September? Or the last date the IVA would usually have ended in November?
Cori says
This is what I was told in email
“I spoke with my colleague on the payments team regarding this and although your final IVA payment is set to be November, as per the original proposal this was actually due to end in September but you previously used 2 payment breaks which extended your payments by these two months.
Because of this, if you would like to finish your IVA earlier, you can make your July, August & September payments and pay off the 2 payment breaks so the IVA would finish in September when it was supposed to originally end.
As discussed, once you have made your final monthly contribution you will have no further payments to make whilst we are in the process of completing & closing your IVA”
Sara (Debt Camel) says
As discussed, once you have made your final monthly contribution you will have no further payments to make whilst we are in the process of completing & closing your IVA”
Did you discuss whether this would apply to any windfall payments?
Cori says
We didn’t discuss no i didn’t think it would count as a windfall but more as earnings as it is just income I am owed in benefits. If it comes before September I will have to tell them and give them some I imagine but if my final date is September and that’s when the IVA is complete doesnt that mean anything after that date is not included? Or is it when you get the actual certificate? Because in that case an IVA isn’t actually 60 months as they agreed wouldn’t that be unfair?
Sara (Debt Camel) says
A lot about IVAs is unfair and I can’t guess what your IVA firm will decide here.
Cori says
My question is more simply put, after the last payment I have been told that’s the end of my IVA so is that the end of the terms I am subject to? Or is this after a certificate is received? I am sceptical to ask because if I receive the back payment after and mention it they may decide they are entitled to it but I am not sure legally if I am required to disclose as it is after my end date.
Does that make sense? Sorry I am just looking for some clarity.
Sara (Debt Camel) says
And I cannot give you clarity.
Your IVA ends when you have the completion certificate. Before that they MAY be a point after which your IVA firm will disregard and windfalls.
John says
Hi I’m currently in an Iva and I pay £100 per month, 5 months ago we had a pay increase so I basically had an increase in my pay of around £400 per month extra
I’m panicking now as I have to get in touch with my Iva advisor and tell them about the increase.. how much do you think I’m going to have to give them back !!
I’ve been really dumb with this
Sara (Debt Camel) says
This depends on what your IVA says… the increase is sometimes from your next annual review.
Also have your expenses also gone up?
Eddy says
Hi, I am wondering if anyone can help me with some clarity.
I have been on IVA since Sept 2019. For first 5 month I paid £100 per month and then since Feb 2020 £233 per month.
I was slow with annual reviews and completely admit my fault and recently after catching up with all reviews received ”additional monies due” letter which comes to £4281.38. Again, that’s ok, as I did have overtime/pay increase in the last few years.
my initial question: When have I paid enough to finish my IVA considering the following:
1) Total debt entering IVA was £12841
2) after 5 years I would have paid £13315 by monthly payments (already paid £10286 with 13 month left giving additional £3029)
3) On top of £13315 I have to pay ‘monies due’ £4281.38 so that would give total amount paid into IVA £17596.38.
That means i would have covered my dept. in full + £4755.38 paid in fees.
Is that not too much to pay in fees?
To me it really seems like a daylight robbery if I am honest.
Thank you in advance, Eddy
Sara (Debt Camel) says
did you get a large pay increase between Sep19 and Feb20?
Eddy says
Hi Sara,
Thank you.
Yes, I have had a pay rise.
As per my last annual review in August this year:
Total Balance received £10166.65 (my debt)
Statement of affairs creditor balance: £12841
Three of the creditors have the following status ‘Awaiting claim’ How come after 4 years into IVA?
Additional monies owed £4281.38
When I signed the IVA agreement the following costs (fees) were agreed to:
Nominee fee – £2000
Disbursements – £300
Supervisors Fee – £1350
Total: £3650
Summary:
If I would continue with my monthly payments + paid additional money owned I would have paid £17596.38 into my IVA.
As it stands total debt is £10166.55 or £12841 if those appear who have awaiting claim status.
If I understand everything correctly the total fees would add up to following:
£17596.38 – £10166.55 = £7429.83
£7429.83 paid in fees which is double the amount to what is mentioned in my contract.
In other words, it is 73% of total debt.
Also in my contract the following additional fees were mentioned when I started:
Where additional assets are to be released, the Supervisor will be entitled to 15% of those further realisations in addition to the total cost. Additional assets can include overtime, bonus, commission, PPI, windfalls, after acquired assets, but excludes any increases in regular income.
It says – excludes any increase in regular income hence my concern.
Many thanks.
Sara (Debt Camel) says
If you think you are being charged more fees than your IVA paperwork says, you should make a complaint to the IVA firm and ask them to review this.
Eddy says
Hi Sara,
Thank you.
I have put these numbers to them couple of days ago pointing out details in my contract and asked them to give me the detailed breakdown of how the fees are worked out.
2 days on and no reply yet… :)