It is common where a couple both have debts for a interlocking IVAs to be proposed. The couple may think of this as being a joint IVA but legally it is two separate IVA agreements with a single budget – income and expenditure – and a single monthly payment being made.
That may work well, but it’s important to look at each person as an individual as well. There is no reason why both partners should have the same debt option. If they have very different asset and/or incomes, different debt solutions may work better for them individually and be best for the couple and their family going forward.
So this article looks at some of the combinations of debt solutions that can be used to get the best result for couples.
To find out more about the different debt solutions, here are jargon free guides: IVA, Debt Relief Order (DRO), bankruptcy, DMP. Also one partner may be able to repay their debts normally – I’ve called this the Repay option.
Joint budgets and individual budgets
A joint budget may demonstrate that overall the household can’t manage the combined debts, but individual budgets are needed to look at the different possible options. Expenses can be split in relation to the incomes. If someone has children from a previous relationship it may be more appropriate for them to have all the child-related benefits and expenses.
IVA & DRO
I saw this on a letter to a couple proposing interlocking IVAs: A DRO is not a viable debt solution as the criteria have not been met.
But one of the couple was a stay-at-home mum, with no assets or income apart from some child-related benefits. It seemed likely to me that she would have qualified for a DRO and her husband could have had an IVA.
Some of the advantages of going for a DRO for one partner are:
- DROs very rarely fail. They also don’t require any payments, are cheap to set up and the debts are wiped at the end of a year. DROs are a simple way of clearing debts for someone with no assets and very little income.
- the IVA failure rate is probably about 20-25%. If the husband’s IVA fails, or the couple separate at least her debts are already dealt with.
- by not including her debts, all the disposable income is available to go into his IVA. If he later has problems with his job or health, his creditors may be more likely to accept his IVA being closed early as they will have had a bigger return.
- if either half of the couple inherits any money or has another windfall during the 5+ years the IVA may take, it is likely to work out much better if one of them has had a DRO.
I can’t think of any disadvantages for one partner having a DRO rather than interlocking IVAs.
A DRO should be a debt adviser’s first thought whenever someone’s only income is from benefits, even if these are large disability benefits, if their debts are under £20,000, they are renting and meet the other asset criteria.
IVA & bankruptcy
If one partner doesn’t qualify for a DRO, then bankruptcy is an alternative. Most people don’t have to make any monthly payments in bankruptcy, so for someone with a low income and no assets this is pretty much the same as a DRO, with the advantages as above (certainty, over more quickly) but with the downside of the high bankruptcy fee.
If someone’s income high so monthly payments in bankruptcy are likely, it may be simpler to go for interlocking IVAs rather than the couple having to manage payments to the Official Receiver and the IVA.
Without a high income, it’s usually better for both parties to go bankrupt.
DRO & bankruptcy
The combination of DRO for one partner and bankruptcy for the other is common because it avoids two lots of bankruptcy fees.
IVA and DMP
This isn’t a common combination. It needs quite an unusual combination of circumstances to have one partner who couldn’t afford to make the normal repayments to their debts (the Repay options considered below) but who could make a large enough payment to their debts for a DMP to be quicker than an IVA and still pay their fair share of the household expenses.
If both people have problem debts and one person’s problem is large enough to need an insolvency solution (IVA, bankruptcy, DRO) with all the downsides that brings, then it’s often best for both partners to be looking for an insolvency solution rather than add the uncertainty of a DMP into the mix.
DRO/bankruptcy and Repay
This works well when one partner with a significant amount of debt has few assets and low income. If that person’s debts are sorted by a DRO or bankruptcy, their partner may not need a debt solution at all. This sometimes isn’t clear to the couple themselves, who are struggling with a combined debts that are unaffordable.
The advantage of this combination is that one partner retains a good credit record. This can make renting, car finance or a mortgage a bit easier in the future.
It can also feel like a good emotional solution where one partner has had debts from a previous relationship or a business failure say, giving them a clean start as rapidly as possible and impacting the other partner as little as possible.
I think this combination can be missed when interlocking IVAs are proposed. The creditors of the “solvent” partner of course have no reason to accept an IVA, but this may not be clear to them if they only see a joint budget.
IVA and Repay
This combination tends to be feasible when both partners are working and one of them has a lot more income compared to their debts than the other one does. The big advantage again is letting one person retain a good credit record.
How joint debts change the choices
If the couple have large joint debts, this will often make it better for both partners to opt for a form of insolvency, rather than one have a DMP or go for repaying their debts normally. See Joint debts – what happens in an IVA / DRO / bankruptcy for details.
I’ve drawn on my personal experience in talking about how common/rare some of these are. Your case is of course completely individual and there could be good reasons why an unusual combination would be best for you!
If you think you the two of you have rather different debts / assets / incomes, then ask a debt adviser who suggests the same solution for you both what your other alternatives are.