UPDATE – CORONAVIRUS
See Coronavirus – new rules to help people in IVAs for the extra help available until April 2021.
If you can’t make the payment to your Individual Voluntary Arrangement (IVA) this month, don’t panic! There may be options for you to cope and get your IVA back on track.
This is very common – five or six years is a long time for everything to go smoothly in your life.
It is difficult to generalise about IVAs because they really can be “individual”. This article looks at the sorts of clauses that are often included in IVAs to give you a feel for your possible options.
You do need to talk to your IVA firm even if you know the problem is very temporary and you can pay a few weeks late.
What can cause problems for IVAs
Many difficulties happen if your income is reduced:
- losing your job or having your hours cut;
- lower profits if you are self-employed;
- being unable to work because of illness, either your own or someone else in the family, or a new baby;
- having a cut in welfare benefits, for example switching to Universal Credit or losing tax credits.
And increases in your expenses can also cause problems:
- large, unexpected expenditure such as a new boiler or expensive car repairs;
- general cost of living increases. In 2018 council tax, water, petrol and food seem to be going up faster than most people’s wages;
- having your car finance end. This is a very specific case, so read Car Finance in IVAs for what your options will be.
Take a payment break
IVAs have terms included that allow some flexibility if you have an unexpected expense. This is often the ‘first response’ if your IVA seems to be running into serious problems, perhaps because your income has fallen – take a break and see if things improve by the end of it.
If you have a large unexpected expense, a payment break (or reduced payments) will let you save up the money to replace the boiler or even buy a cheap second-hand car if your car finance has ended.
Your IVA supervisor has to approve it, so you won’t be able to have a break just so that you can afford a holiday!
IVAs started after October 2016
If your IVA started after October 2016 and is a “Protocol” IVA, then the following are the normal terms:
- you can have payment breaks or make reduced payments for the equivalent of 9 months payments. So if say you could pay half your normal payments for a 6 month period, this would count as “3 months” of the maximum 9 months used.
- this doesn’t have to be taken as a single break.
- the reduction in payments will be made up by adding on up to 12 months at the end of your IVA.
If you have a minor problem don’t take a break for longer than you need. Think of these automatic 9 months breaks as 9 important cards that you hold in your hand to get you through to the end of the IVA – if you waste a couple early on you won’t have them later when you may need them with a bigger problem.
Also it’s good for the IVA to end as soon as possible. When you are just a year in, it doesn’t seem important if your IVA will go on for another 4 years 6months or 5 years – but it will later on… And the longer the IVA goes on, the more chance of more problems occurring.
The following term was typical of older IVAs:
A debtor will be allowed a payment break of up to 6 months once during the term of the IVA without any modification being required at the discretion of the supervisor. The term of the IVA will be extended by the length of the payment break so that the debtor will make the same number of contributions as agreed in the original proposal.
Here this is just a single break.
Payment breaks work well for short-term problems. But if your ongoing expenses have risen or your income has reduced, you need to talk to your IVA firm about this and say it isn’t likely to get sorted soon. You may need a “variation” to your IVA to reduce your payments for the whole of the rest of the term, not just a break.
Payment breaks also work better if you are making large monthly payments. If you are paying £300 a month, then you can save up to replace something essential quicker than if you are only paying £80 a month.
Cut payments by 15%
Most IVAs have the following term, giving your IVA firm the discretion to reduce your payments if your expenses have risen or income has reduced:
The supervisor will be able to reduce the contribution by up to 15% in total (relative to the original proposal or last agreed variation) without referring back to creditors, to reflect changes in income and expenditure, such change to be reported in the next annual review.
This 15% reduction isn’t much but sometimes an extra £30 a month can make all the difference between being able to continue with your IVA or not.
Larger reductions can sometimes be possible – your IVA firm will propose a “variation” to your creditors who have to vote to accept it.
You can normally keep 6 months worth of pay from your redundancy pay and the rest is paid into your IVA for your creditors. That six months money will let you carry on paying your IVA while you look for another job.
See What happens in an IVA if you are made redundant for more details.
What happens if you can’t get back on track
The IVA is likely to give your IVA firm a lot of discretion about what can be done if your IVA is failing. Here is a typical term:
if the Supervisor feels it appropriate seek creditor views to do one of the following:
- vary the terms of the arrangement, or
- issue a certificate (“Certificate of Termination”) terminating the arrangement by reason of the breach; and/or
- present a petition for the individual’s bankruptcy
That doesn’t give you much of a clue about what will happen and may sound very scary. Let’s look at the three options.
Make you bankrupt
If your IVA is in trouble because you have lost your job or your income has been reduced, it is very unlikely that your IP would consider bankruptcy.
This option is intended more for “won’t pays” rather than “can’t pays”, for example, if you were made redundant then got another job and didn’t tell your IP about your redundancy money.
Vary the terms (“a variation”)
You need to discuss with your IVA firm what, if anything can be done to try to change your IVA so that it can be completed, not failed.
The best alternative for you, if your creditors will agree, is for your IVA firm to propose a variation that your IVA is just treated as been completed. Your IVA firm may use the phrase “on the basis of funds paid to date” – this means that they won’t want any more money to be paid.
This is more likely to be agreed the closer you are to the end of your IVA. In your last year it is very likely, in your first year it isn’t going to happen.
If you can make lower payments, these could be proposed, perhaps also extending the term of your IVA. But be careful of committing yourself to something that is just going on for too long, especially if you think your circumstances are going to get more difficult over the next few years.
It could be better for you to choose to let your IVA fail, see below, especially if you are less than halfway through your IVA.
Could a relative or your partner make an offer to settle the IVA? Read How much should I offer to settle my IVA early? if you think this might be an option.
If you have a house with equity, you may want to consider selling the house to end the IVA. If one of the reasons you have financial problems is the high cost of your mortgage or secured loan, this could be a good idea. But read Can I sell my house to end my IVA? which looks at how this should be done and the possible problems.
Terminate your IVA (“fail your IVA”) – sometimes a good option!
If there are no ways to rescue your IVA and your IVA firm doesn’t want to pay to make you bankrupt, then your IVA will fail. In 2020 more than a quarter of IVAs were failing even before Covid-19 hit.
This isn’t always a disaster. There are many people that have been “sold” an IVA that was always going to prove difficult and some of them should have been advised to go for a Debt Relief Order or bankruptcy at the beginning, instead of an IVA.
- Read Should I switch to a DRO from an IVA? which looks at whether you should make the positive choice to do this. Your IVA firm may be talking about payment breaks and extending the term of your IVA, but if you are currently struggling and meet the DRO criteria, that could be a much better option for you.
- Bankruptcy isn’t nearly as scary as people think, most people don’t have to make any payments at all. Unless you have a house with equity you should seriously consider it.
What should you do now?
If you have an IVA and you are struggling, have a look at the terms of your IVA and see which of the points listed here are included in your agreement. Then call your IVA firm and discuss how to proceed.
In 2020 there is additional flexibility available because of Coronavirus. Don’t assume your IVA will fail, talk to your IVA firm.
If that seems too scary, talk to a good debt adviser first, so they can help you see what your options are.