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When you’re considering an IVA, it’s important that you understand the rules so you protect it from failing. Read on to find out more.
If you’re thinking of starting an Individual Voluntary Arrangement (IVA), it’s always wise to look into the details of the solution first. Of course, most people start an IVA fully expecting to complete it successfully – and for most people that will be the case. But nothing about the future is certain, so it is worth thinking about all eventualities if you want to know what to expect and also how changes in your life may affect the IVA. With this in mind, let’s have a look into what could cause an IVA to fail, what would happen if it did, and how to prevent this from happening in the first place.
Why would an IVA fail?
With an IVA, you pay something towards your unsecured debts for five-six years and then, at the end of it, if all goes to plan, the remainder of your debt is written off giving you a financial fresh start.
Because an IVA allows you to reduce your monthly payment and gives you the chance of writing off a significant part of your debt, it also comes with some rules about what you are and are not allowed to do whilst it’s ongoing. Breaking one or more of these rules can sometimes lead to the IVA failing.
If something happened that meant you couldn’t make any payments into the IVA at all anymore, it would fail and your IP would write to your lenders to inform them of this. This would mean that you would still have the rest of your debts left to pay and any interest that was frozen would be added back on. Technically, your creditors would be able to resume any legal action against you to try and recover the money owed. Although we by no means expect an IVA to fail, it can happen. However, if it did happen, there are still ways of moving forward, which we’ll take you through in more detail later on.
What are the restrictions?
An IVA is a way to deal with insolvency (which means you can’t pay your debts back at the agreed rate) and, as such, it may not be appropriate for you to pursue certain professions such as accountancy, law enforcement, being a prison guard or a solicitor.
There are also rules surrounding what needs to be introduced into the IVA while it’s ongoing as well. If you had a successful PPI claim for example, then you would have to tell your Insolvency Practitioner (your IP supervises the arrangement) and this would likely be put towards your debts. This is because money from PPI reclaims are regarded as assets, rather than windfalls, and will therefore usually be considered part of the IVA.
It’s really important that everything due to the IVA is paid in. If it isn’t, then the IVA can’t officially close and this could delay you getting your completion certificate. When you set up your IVA your IP will go through your income in detail and work out your average earnings. If you happened to earn more than 10% more than your normal earnings then you’d need to put half of that extra money into the IVA. It’s set at 10% to give you the chance to keep some extra earnings, but this rule also means that you can demonstrate you’re committed to paying as much of the debt off as possible.
If you were to receive a windfall of £500 or over, you would need to pay this into the IVA as well. Of course, if the windfall cleared your debts, or gave you enough to offer a full and final settlement figure to your lenders, this would be great news for you as you would be debt free sooner than you thought. And if the amount was significantly more than your debts then you could pay the whole amount outstanding and then have some left over.
The restrictions put in place protect your IVA from failing and demonstrate that you’re committed to paying as much of your debts back as possible. You shouldn’t worry about making a mistake that could lead to failure – all the rules will be clearly laid out for you in the arrangement when it’s first put together. Your IP will also guide you through the process and will conduct a review of your income every six months to work out whether there are any additional monies that need to be paid into the IVA. These reviews mean that you and your IP can keep track of what needs to be paid in and it’s unlikely anything will slip will through the cracks.
Ways to prevent an IVA from failing
While conversations about restrictions and possible failure may seem daunting, it’s important to remember that no one expects your life to stand still whilst the IVA is ongoing – it will last for five years at the least after all. In light of this, there is a certain amount of flexibility built into the IVA proposal to allow for life changes which can prevent an IVA from failing.
It is sometimes possible to change the amount that you pay into an IVA and your IP will advise you of how this works and what you can do should you encounter problems. For instance, it may be an option for you to take a payment break and stop paying into your IVA for up to six months. Your IVA would simply last longer to allow you to make up for this. If you needed to lower the amount you pay in every month there’s flexibility for your IP to do this without asking the lenders permission, as long as the change isn’t greater than 15%. If you needed a reduction of more than 15% then we would hold another meeting with your lenders to see whether they agreed to the changes.
For more information on this, have a look at our blog, “Can I Vary Payments on an IVA?”
Ways forward if your IVA fails?
If an IVA was the right solution for you and you worked with your IP to stick to the rules, it’s very unlikely that your IVA would fail. It does happen in some rare cases, so let’s look at the ways forward if it did.
One option for you if your IVA was to fail would be to go bankrupt - your IP would ask the court to make you bankrupt if the lenders told them they had to. Even if your lenders didn’t ask your IP to do this, you are able to make yourself bankrupt if it’s the best course of action for you. Bankruptcy is overseen by a court official called a Trustee and is another debt solution that, in the right circumstances, can provide a welcome route out of debt.
Bankruptcy lasts for a year, and if the Trustee can see that you can afford it, they may instruct you to pay something into the bankruptcy every month for three years. If the bankruptcy concludes successfully, the rest of your unsecured debts included in it would be written off. Unlike an IVA however, bankruptcy does mean that you’re more likely to have to sell your assets, including your home if there’s any equity in it.
Debt Relief Orders
A Debt Relief Order (DRO) is another option should your IVA fail. This is similar to bankruptcy in that is lasts for a year and results in your debts being written off at the end, but differs because you don’t have to pay anything towards it while it’s ongoing. Because of this, it’s reserved for those who have very little to no spare income to put towards their debts and could never pay them off in a reasonable amount of time. To qualify for a DRO you can’t have more than £50 in spare income every month, you can’t have assets over £1000 and you can’t have a car worth over £1000 either. The amount of debt you can have to qualify for a DRO is capped at £20,000.
Debt Management Plans
If your IVA fails but your financial circumstances have actually improved, then it may be possible for you to go on a debt management plan instead (DMP). On a DMP your payments would still be lowered to an affordable level but you wouldn’t find yourself with the same restrictions that come along with an IVA. You would still put something towards your unsecured debts every month but on a DMP you would continue to pay until the debt was paid off completely. A DMP can also be used as a temporary solution until your circumstances improve to the point where you can go back to your original payment plan. For more information on DMPs have a look here.
Which way forward would be best for you depends on your individual situation and may come down in part to what caused the IVA to fail in the first place.
If your debt has become unmanageable looking into debt solutions is definitely a step in the right direction – ignoring the issue is always the worst thing you can do. Remember, there are trained, experienced professionals ready to guide you to the right solution and then help you complete it successfully. Just use the options to the left to speak to one of our advisors who will be only too happy to help.
by Christine WalshBack to blog home