What is a Debt Relief Order and how does it work?
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Will you be able to afford the payments on an IVA?
An Individual Voluntary Arrangement (IVA) is a formal solution to deal with unsecured debts that have become unmanageable. The arrangement depends on you being able to pay something towards those debts each month – but it will be a lower, affordable amount.
Your payments are always going to be affordable for you on an IVA. They’re worked out that way as the whole point of starting an IVA is to allow you to pay something towards your debts each month, while lowering those payments so that they’re realistic and sustainable.
An IVA normally lasts for five to six years and, if you complete the solution successfully, the rest of your unsecured debts included on the plan will be written off.
How are my payments worked out?
Your payments will be based on your affordability – there isn’t one set payment for everyone who starts an Individual Voluntary Arrangement. When you speak to a debt advisor, they will help you through the process of putting your income and expenditure together. This will show absolutely everything you spend your money on and absolutely everything you’re earning or receiving in benefits.
When the expenditure amount is taken away from the income amount, you’re left with what’s known as your disposable income. This is the amount that you’ll be expected to put towards your debts on the IVA each month. So as you can see, the exact amount varies depending on the individual’s circumstances.
Creditors do have guidelines as to what they feel is reasonable for your expenditure so if it seems like you’re spending more than normal on a certain area, your debt advisor may mention this to you to see whether there’s anyway you could cut back or to find out if there’s a particular reason why. If you’re spending more on travel than a creditor expects for instance, but that’s because you have a long commute, this would be taken into account.
If for any reason you find that you’re not in a position to put anything towards your debts each month, your debt advisor will talk to you about other more suitable options.
What about my assets?
An IVA can sometimes affect your assets, but you won’t ever have to sell your home. If you’re a homeowner, you have to try to release equity from your property and pay this into your IVA six months before it ends. You’ll only have to attempt this if you’ve got more than £5,000 in equity.
You will never have to release more than 85% of the value of your home and there will be an evaluation to see how much equity there is altogether. Once your IP has worked out how much the figure 85% is, anything that you owe on a mortgage or secured loan would then be deducted and what’s left would be considered in the IVA. If this amount is more than £5,000, it will be considered in the IVA.
If you’ve got less than this, you won’t have to release any equity from your property. Your Insolvency Practitioner (IP) will only ever look at your share of the equity – so if there’s £5,000 equity in the property but you own this jointly with a partner, your share is only £2,500.
If you do have more than £5,000 in equity in your home, you’ll need to attempt to get a remortgage to release this equity. In some cases you may find that you’re not able to remortgage but you will be obliged to attempt it. There are sometimes limitations on when you’re expected remortgage to the full 85%, but this will all be explained by your advisor. If you’re not able to remortgage, your IVA will be extended for up to another 12 months.
Your IP might also look at some of your other high value assets, depending on what they’re worth. If you’ve got an expensive car, for example, and you could get by with a cheaper model, you might have to downgrade and pay the extra money into your IVA. This is down to the creditors – it’s still possible to put together a proposal with a high value asset like this if there’s a reason that you have it, but the creditors may request a downgrade at the creditor meeting.
What if my circumstances change?
There is some flexibility in your IVA payments which means that you can sometimes lower the amount you pay into the IVA if your circumstances change. If the change is more than 15% however, your solution provider will need to organise something called a variation meeting, so your creditors can either agree or disagree with the payment being lowered. For your payments to be lowered you would need to provide evidence of your change in circumstances and this would be reviewed periodically.
If your circumstances improve, there’s also a chance that you’ll have to pay more into your IVA, although your payments will always remain affordable for you. If you’re earning more, your solution provider will check that none of your other expenses have gone up as well and that you are in fact better off due to the change. Your IVA is reviewed once a year to see whether there have been any changes in your circumstances and rises in income will be taken into account. Again you’ll need to provide evidence of this and if there has been an increase, you’ll need to put half of the rise in your disposable income into the IVA. You can find out more about lowering and raising your payment amount on an IVA with our previous blog, varying payments in an IVA.
If you’ve earned any overtime, bonus or commission you may be expected to put some of this towards your IVA. With these types of earnings you’re allowed to keep 10% over what’s listed on your income and expenditure statement and half of anything extra. For a more detailed look into how this works, additional monies on an IVA should help.
Other things to consider
Apart from how your payments work on an IVA, there are other aspects to this debt solution that need to be considered before you go ahead with it. For instance, it will have a negative effect on your credit history for a minimum of six years and however long the solution lasts. You will also have to stick to a budget while your IVA is ongoing, to make sure that you can maintain your payments towards your debts.
To find out whether an IVA could help you deal with your unsecured debts, get in touch with a debt advisor. You can speak to our advisors using any of the options at the bottom of the page. They’ll be able to take a look at your circumstances, including how much you can afford to pay, and tell you which debt solution – if any – is the best option for you to get debt free. If you’ve still got questions about what an IVA would mean for your finances, you can check out our blog on whether an IVA is a good or bad thing.
by Emily BancroftBack to blog home