Abby is pregnant and worried she won’t be able to afford the monthly IVA payments:
My IVA was set up at the start of 2020. There are four debts in it, totalling £13,000. All the debts date from a previous relationship, my new partner doesn’t have a debt problem.
My IVA payments are £90 a month. I’ve managed so far, but I now need to buy things for the baby – cot, buggy etc. We are renting and have no savings. And I will have hardly any income on maternity leave.
An IVA is a contract between you and your creditors – you make monthly payments and at the end of five or sometimes six years, your remaining debts are wiped out.
There is some flexibility in an IVA, but not a lot…
If a major life event such as redundancy, sickness or separation occurs, the IVA often runs into big problems. And having a new baby is often going to reduce your income and increase your expenses.
Let’s look at the details of Abby’s case, and what her options are.
Abby is understandably focusing on the next year or so – before her baby is born and during her maternity leave.
She needs to know how much maternity pay she will get and work out how much child benefit and other benefits she is likely to receive during the maternity period.
She may be able to get help from Universal Credit, but this will depend on her partner’s income. A good way for her to find out what benefits she may get is this calculator.
There are also the longer-term costs of having a child.
When her maternity leave ends and she goes back to work, will she have high child care costs? Will she need a bigger place to live? A one-bed flat may be fine for a year but not with an active toddler.
What flexibility is there in an IVA?
If your income goes up because of promotion or a pay rise, your IVA payment will go up. But if your income drops and your expenses increase, there are only limited provisions for reducing your monthly payment.
IVAs have two sorts of flexibility can help – but the help may not be enough for Abby.
First she may be able to take a ‘payment break’ in her IVA. This is normally 9 months. These break periods are added onto the end of the IVA.
This can be very helpful if you have one-off expenses – your boiler dies, you need to replace your car etc. So 9 months payment break now will be real help for Abby to get the stuff she needs for a first baby and get her through the first part of her maternity leave.
Second, an IVA firm can reduce the payments by 15% for the rest of the IVA. But 15% of £90 is only £14.50 a month, so that won’t make much difference to Abby.
Larger changes are possible but they require the creditors to vote to approve the change in the IVA:
- if Abby was closer to the end of her IVA, her creditors could simply agree to close her IVA, accepting the payments she has made already as all she can afford;
- if Abby was paying a larger monthly amount, say £200, her creditors could agree to her making much lower payments, not just 15% less. But at £90 a month her creditors are hardly getting any money from the IVA as most of it is going in the IVA fees;
- a longer payment break would make her IVA much longer than 5 years.
If a cot or a buggy were the only problems, then the IVA payment break could work well. But can the rest of the IVA be afforded?
There is a range of situations here.
Someone in a well-paid job with excellent maternity pay, who has nearby relatives that could give free childcare may be fine. Someone with a job with difficult and inflexible hours could find it impossible to return to work at all. Most people will be somewhere in between.
But I think it’s fair to say that everyone finds they are much shorter of money after they have a child than before.
Few people paying £90 a month to an IVA will find it simple to resume these payments after their maternity leave ends.
The good news is that if Abby decides her IVA is no longer a good idea, she will probably qualify for a Debt Relief Order. Abby has no house, car or savings and her debts are less than the DRO limit of £30,000. Once the baby arrives she is almost certain to be under the £75 a month spare income level.
For Abby, a DRO looks like it could be a good way forward.
If there was some reason that Abby didn’t qualify for a DRO, then bankruptcy may be her best debt solution as she has no assets to protect.
What should Abby do?
I think she should talk to a good debt adviser about her options, thinking not just about the next few months but what will happen when her maternity leave ends.
Her local Citizens Advice can help with this – and they can also advise on maternity rights and her benefits situation.
She could also immediately ask her IVA firm for a payment break. But if her best option is going to be to fail her IVA and then have a DRO, she doesn’t want a payment break now as that will just delay things.
Was Abby’s IVA ever a good idea?
With no assets to protect, it’s not clear why an IVA was ever in her best interests.
She was told she had too much spare income for a DRO and she couldn’t afford the bankruptcy fees.
To her, the £90 a month proposed IVA payment was obviously larger than the £75 a month DRO limit. But I wonder if anyone explained the DRO calculations are based on a different set of allowances and it was possible she could be under the £75 DRO limit?
And did her IVA firm point out that she would be much better off if she didn’t start the IVA but instead saved up the £90 towards the bankruptcy fees? Or that she might have been able to get some help from grants towards the bankruptcy fees?
This feels like it could have been poor debt advice – indeed IVA mis-selling.