A reader asked for help as she is pregnant and can no longer afford the monthly IVA payments. 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 built in, but not a lot… if a major life event such as redundancy, sickness, separation or, as in this case, a new baby occurs, the IVA often runs into big problems.
Let’s look at the details of Abby’s case, what her options are and what other alternatives there would be in different scenarios. And there is another interesting question – should Abby ever have started this IVA?
“My IVA was set up at the start of this year. There are four debts in it, totalling £13,000. All the debts date from a previous relationship, my partner doesn’t have a debt problem.
My monthly IVA payments are £90. I’ve managed the payments so far, but I now need to buy things for the baby – cot, buggy etc. We are renting and have no savings.”
Abby is understandably focusing on the next few months, but after the baby is born, there will be another four years to go in her IVA.
She needs to know how much maternity pay she will get and work out how much child benefit and child tax credit she is likely to receive during the maternity period. If she can then return to work, she will probably have childcare costs but may be able to get working tax credit to help with these.
A good way for her to find out the different levels of benefits she is likely to get over the next few years is this calculator.
There are also the long-term costs of having a child – not just buggy and nappies, but will she need a bigger place to live? A studio flat may be fine for a year but not for a toddler.
What flexibility is there in an IVA?
IVAs are often sold as being “an affordable monthly payment”. If your income goes up because of promotion or a pay rise, your IVA payment will go up too, but if your income drops and your expenses increase, there are only limited provisions for reducing your monthly payment.
Most IVAs have two clauses that give some flexibility.
First you may be able to take a ‘payment break’. Before October 2016 this was usually limited to 6 months, but for more recent IVAs it is typically 9 months. Any payments you don’t make during this time are added on to the end of your IVA.
This can be very helpful if you have one-off expenses – your boiler dies, you need to replace your car etc. Six lots of £90 could be a real help for Abby to get the kit she needs for a first baby.
The second clause allows your IVA firm to reduce your payments by 15% for the rest of your IVA. But 15% of £90 isn’t likely to make much difference to Abby.
Larger changes are possible but they require the consent of your creditors. If Abby was close 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 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 could be proposed, but that would be making her IVA very long.
If a cot or a buggy were the only problems, then the 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 also 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.
If Abby decides her IVA is no longer viable, she broadly has two options after it fails:
- a Debt Relief Order Abby has no house, car or savings. Her debts are less than the DRO limit (the IVA fees won’t be enough to push her debts over the £20,000 limit). Once the baby arrives she is almost certain to be under the £50 a month spare income level. For Abby, a DRO looks like it could be a good way forward.
- bankruptcy If there was some reason that Abby didn’t qualify for a DRO, then bankruptcy is the obvious solution as she has no assets to protect.
If Abby had started an IVA because she had a house with equity to protect, then she would have to choose between a token payment debt management plan and selling the house. Neither may sound like great alternatives – a token DMP in this situation amounts to crossing your fingers and hoping something will turn up. If the house is going to be too small in a year or two, then selling and renting is probably a more realistic option, and it may be possible to use the equity from the house to settle the IVA but care has to be taken when selling a house in an IVA.
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. I asked if the IVA firm had mentioned the possibility of a DRO or bankruptcy – she said 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 £50 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 just under the £50 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 or that reclaiming PPI might give her the money for them?
This feels like it could have been poor debt advice.