Individual Voluntary Arrangements (IVAs) are usually 5 or 6 year commitments. If something goes wrong during the term and you can’t make the agreed monthly payments, there may be options for you to get it back on track but sometimes the IVA will have to fail. This is not unusual – about a quarter of IVAs do fail.
It is difficult to generalise about IVAs because they really can be “individual”. But many IVAs follow a common pattern and this article looks at the sorts of clauses that are often included in IVAs. If you have problems, have a look at what your IVA says to make sure.
What can cause problems for IVAs
The most common causes of difficulties include:
- losing your job or having your hours reduced
- a decline in profitability 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 an unexpected reduction in welfare benefits, for example the recent changes in child benefit and child tax credit have caused problems for some families
- large, unexpected expenditure such as a new boiler or expensive car repairs.
Take a 6 month break
The following term is very common in 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.
If you have a large unexpected expense, this clause could allow you to suspend your monthly payments use the money to replace the boiler or even buy a cheap second-hand car. But your supervisor has to approve it, so you won’t be able to have a break just so that you can afford a holiday!
It is also frequently used as 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.
Extra flexibility in many IVAs started after October 2016
If your IVA started after October 2016 and is a “Protocol” IVA, then the usual “one 6 month break” described above has been replaced by a more flexible arrangement if you have unexpected expenditure or reduction in income:
- you can have payment breaks or to 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.
Reduce contributions by 15%
If the following term is included in your IVA, it allows your IP to have 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.
Larger reductions can sometimes be agreed but they would need the consent of your creditors. This 15% reduction isn’t much but sometimes an extra £30 a month say can make all the difference between being able to continue with your IVA or not.
There are usually specific clauses in an IVA about what happens if you are made redundant, for example:
Pay to the supervisor within 14 days of receipt of any redundancy payment any amount in excess of 6 months net take home pay (as set out at the last annual review date). If there is no amount in excess of 6 months net take home pay no payment is required.
(NB there will probably be more clauses about redundancy, I am only looking here at the issue of IVA affordability.) This term effectively gives you six months to find a new job, during which time you could continue to make the usual IVA payments. If you think you will have any additional expenses during this time – perhaps you need to pay for some training to enable you to get another job or you may need to move house – you could ask for a payment break during this period.
If at the end of six months you are still out of work, you could then have a six month payment break.
What happens if it isn’t possible to get back on track
The IVA is likely to give your IP very broad discretion about what can be done if an IVA is failing:
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 and may sound very scary, especially if one of the main reasons you chose an IVA in the first place was because you might lose your job if you go bankrupt.
If your IVA is in trouble because you have lost your job or your income has been reduced, it is pretty unlikely that your IP would consider bankruptcy. That 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.
“Varying the terms” can mean almost anything, but there are some approaches that you might want to consider discussing with your IP.
The best one, if it is acceptable, is for the IP to propose that your creditors accept that your IVA has been completed on the basis of the money you have already paid, so your remaining debts will be written off. 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 and go bankrupt – especially if you are less than half way through your IVA.
Could a relative or someone else 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.
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 (if any) of the points listed here are included in your agreement. Then call your Insolvency Practitioner and discuss how to proceed. It is for your IP to make the decision, knowing what the possibilities are will help you to talk them through with your IP.
If you are just thinking about entering an IVA, then it’s good to have done this research. Too many people rush into an IVA without thinking about the things that could go wrong. As a general point, the larger your IVA payments are, the more “wriggle room” there is later if problems arise. If you are paying £400 a month into an IVA, then a payment break of a few months would let you cover some pretty large unexpected bills. If you are only paying £100 a month, there won’t be much scope to reduce this later if there are difficulties.