Coronavirus – can’t pay your IVA? Would a break help?

If you are worried about your IVA because Coronavirus has affected your household finances, this article looks at

• the extra flexibility to help people in IVAs. This help has been extended to April 2021; and
• how things may change in the next few months, with furlough and payments breaks likely to end.

Your IVA firm and your creditors will not want your IVA to fail because of a temporary Coronavirus problem.

Don’t assume your IVA will fail and just stop paying. You can contact your IVA firm and talk to them about what help they can give – for many people that will be an IVA payment break.

It may be a good idea to talk to a debt adviser as well.

Extra IVA flexibility to help

New guidance

In April 2020 the Insolvency Service issued guidance giving extra flexibility for Protocol IVAs where the borrower has problems because of Coronavirus.

In September 2020 this was updated and extended. It now applies until April 2021 – see  Coronavirus (COVID-19) Guidance for the Straightforward Consumer IVA Protocol.

An IVA firm can always go back to your creditors and ask them to approve changes to your IVA. This is called “a variation”  but it can be a slow process.

This new guidance gives situations where the IVA firm can give more help immediately with no need for a variation.

IVA firms should be sympathetic to all the Coronavirus problems that can occur. It may not be you who has lost their job, has to self-isolate, or whose business is struggling. It could be your partner or someone else in your house that normally pays some bills, so your expenses have risen.

Most IVAs use the Protocol standard set of terms and conditions. If you aren’t sure if yours does, ask your IVA firm. If your IVA doesn’t use the Protocol, your IVA firm should still be sympathetic if you have Coronavirus financial problems and try to find a way forward that will work for you.

More flexibility to reduce payments or have longer payment breaks

The April 2020 guidance said if you have Coronavirus problems – either a reduction in income or an increase in expenses – you could reduce payments by up to 25% and take payment holidays for up to three months without a variation being required.

In September 2020 this has been extended to allow you to reduce payments by 50% and take payment holidays of up to 6 months.

These new options are in addition to the standard IVA Protocol provisions which allow your IVA firm to reduce your payments by 15% and to give up to 9 months of payment breaks, see What happens when you can’t afford IVA payments for details. So if you have already taken payment breaks you can still get these extra months.

Payment breaks are added onto the end of your IVA, so you will be paying the same amount in the end. They are a good option if you expect to be able to get back to paying your IVA at some point, but you can’t manage it at the moment.

Flexibility around redundancy pay

The standard Protocol says if you get redundancy pay you can keep 6 months worth of normal pay but have to pay the rest into your IVA.

This lets you carry on making the normal IVA payments for 6 months. See What happens in an IVA if I am made redundant? for details, including what happens if the amount is large or if you get a job within the 6 months.

The guidance says:

The supervisor has discretion, in relation to whether any redundancy payments in excess of six months net take home pay are required to be brought into the arrangement as set out in clause 10.6 during the duration of the pandemic. 

That is a bit vague. If you have lost your job and think it will take you more than 6 months, ask your IVA firm to be allowed to keep all your redundancy pay for now.

You don’t have to pay in overtime if you are a key worker

This is the clause in the 2016 standard Protocol about overtime:

10.4 Where the individual is employed, the consumer must report any overtime, bonus, commission or similar to the supervisor if not included in the original surplus calculation, where the sum exceeds 10% of the consumer’s normal take home pay. Disclosure to the supervisor will be made within 14 days of receipt and 50% of the amount (over and above the 10%) shall be paid to the supervisor within 14 days of the disclosure.

The guidance says:

Paragraph 10.4 of the protocol should not apply to critical workers’ overtime during the COVID-19 pandemic. A critical worker is defined by the list published by the Government and determined by the employer. Additional proof of critical worker status may be required by the supervisor.

This very good news for key workers.

No equity release

The guidance says that no attempt should be made to release equity during the pandemic unless the debtor wants this. Instead, the supervisor can extend the IVA for 12 months.

This applies to all debtors, even if you are not affected by Coronavirus, because getting good house valuations can be difficult.

I think you should not be asked to extend your IVA unless it is clear that you have more than the minimum amount of equity. See How does Equity release work in an IVA for details. I suggest you should object if you are told to extend your IVA by 12 months when you don’t think your house is worth enough.

I think you should also object to an extension if Coronavirus has badly affected your household finances.

Your IVA firm can choose to put forward a variation to your creditors saying that your IVA should be treated as closed at the end of the term, with no extension. Ask for this if you don’t think an extra year is suitable.

Autumn 2020 – will you be able to manage your IVA?

Less help from government and creditors

When the new IVA  guidance was first published in April, there was a lot of other help on offer from the government and creditors.

Now in mid-September, it seems likely most of this help will be phased out or reduced over the next couple of months:

• It is likely that furlough will be ending.
• The FCA has decided mortgage lenders don’t have to offer another mortgage payment break.  (If you’ve not taken a mortgage payment holiday yet, you can apply for one until 31 October 2020, or if you have had one payment break you can apply for a second one up until that date. )
• The FCA has not said anything about extending car finance and other loans and credit card breaks. But as mortgage payment breaks aren’t being extended, my guess is that these other breaks won’t be either.

Lenders may have to offer you help, what the regulator calls forbearance. But for mortgages and car finance, if you get arrears you could potentially lose your house or car.

Is your situation likely to get better or worse?

This may feel you are being asked to predict a very uncertain future, but some people will now have a much better feel for what may happen than they did back in the early days of lockdown.

With furlough ending, you may be back to full-time work. Unless there is a new lockdown that will change things again, but for now you are ok.

You may have been told you are being made redundant. Or you may think this is likely to happen in the next few months. Or you may be worried about how fast your self-employment income will recover.

Your partner or someone else who you share household bills with may be looking at a difficult future, so you may have to plan on paying more or all of the bills.

Should you take a further IVA break? Or talk to a debt adviser?

Your priorities need to be your mortgage/rent and priority bills such as council tax, utilities and car finance. These must be paid, even if this means paying little or nothing to your IVA.

Unless your finances are fine again, for most people taking an IVA break – or a further one if you have already had a few months – is probably their best option. This break gives you longer to get back to normal.

If you aren’t sure you can pay your essential bills and normal expenses, your IVA is not your main problem! Ask for an IVA payment break but you also need to talk to a good debt adviser as soon as possible.

The other case where you should talk to a debt adviser now is if you were having difficulty paying your IVA even before the pandemic. If you are in the first couple of years of an IVA and you didn’t have a house with equity to protect, you may be wondering if there is better debt solution for you then an IVA, so get some advice.

These breaks only postpone the problem if your finances don’t recover. But for most people they are a sensible choice at the moment. By April next year, it will be clearer to you and to your creditors what your financial position is.

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