How Does an IVA Restrict Your Spending?

How does an IVA restrict your spending? Anybody considering an IVA must take the time to understand IVA spending restrictions and how these will affect their daily life. You can find the answers with me here.

What is an IVA?

An Individual Voluntary Arrangement (IVA) is a legally-binding debt solution between a debtor and multiple creditors of unsecured debts. It’s usually an option for people who are in employment and have significant debts to more than one creditor or company.

In a nutshell, it is an agreement to pay creditors a monthly payment over a long period, typically for five years. There may be additional requirements to end the IVA, but once the IVA does end, any remaining debt is written off.

IVAs cannot be agreed upon with creditors and set up by yourself. They must be proposed to your creditors and then managed by accredited professionals called Insolvency Practitioners (IPs).

An IP is usually found at a debt management company, and they will charge you for their work. However, their fees are calculated into your monthly payment, which is split between creditors.

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There are ways to have debt written off in the UK.

If you genuinely can’t afford your debt repayments then looking into whether you could have your payments lowered or written off might be just what you need.

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How does an IVA work?

When an IVA is set up, you must make a monthly payment to the IVA. The IP then divides this payment between all the creditors included within the IVA. This usually continues for five years. Once five years of repayments have been met, the IVA can end if you:

Release equity from a property you own and make a lump sum payment
Get a third party to make a lump sum payment into the IVA for you
Extend the IVA payments for one more year

Once the IVA does end any outstanding debts to all of the creditors are written off, giving you a fresh start. But remember, IVAs don’t cover secured debts and some other types of debt, such as student debt, rent arrears and court fines.

Your IVA proposal

An Insolvency Practitioner must assess your suitability for an IVA against alternative debt solutions. If they believe you will benefit from using an IVA due to debts you won’t be able to repay in a reasonable timeframe, with your permission they can propose an IVA to your creditors.

The IP will calculate how much you can afford to pay into the IVA each month based on your income and essential living expenses.

They will subtract their fees from this amount and then calculate how much this would pay back to each creditor each month, which is proportionally calculated based on the amount of debt you owe each creditor.

For example, if you owe one creditor £7,000 and another creditor £3,000 the IVA repayments will be split 70% and 30% respectively (minus IP fees).

The IVA proposal will then be put forward to creditors at a meeting, which is usually conducted remotely. Each creditor can then vote on whether to accept or reject the IVA proposal.

If at least 75% of creditors vote in favour then all creditors are included in the IVA, even the ones that voted against it. The IVA can also be approved if the creditors owed the most money vote in favour of the IVA, even if they make up less than 75% of creditors.

Once approved, you will have an annual IAV review to make sure you’re contributing the correct amount of income to your IVA.

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How does an IVA restrict your spending?

An IVA restricts your spending because your IP will make an IVA proposal to creditors that makes you pay your disposable income into the IVA. You will be forced to live on a tight budget.

The IP will ensure you have enough money to keep up with essential living costs (your expenses), but your surplus money is to be used to pay into the IVA. This prevents you from making luxury purchases for a long time.

Therefore, using an IVA requires you to budget accurately and effectively.

What expenses are allowed in an IVA?

You’re allowed to include all expenses that are considered essential to maintain essential living standards and to ensure you remain employed. Examples include your rent, utility bills, groceries, standard hygiene products and costs you incur to get to and from work.

When creating your IVA proposal, you will have fixed and variable IVA expenses.

Fixed expenses are those that stay the same each week or month, such as rent payments. Whereas variable IVA expenses are those that can change more frequently, such as fuel costs you might incur as part of your job.

Variable expenses can be challenged if they don’t match up with what these expenses usually cost. But each IVA is taken on its own merit. For example, your work commute costs might be more expensive due to living in a certain area and travelling further to work than the average person does.

You might have an emergency fund calculated into your expenses. This is money that you’re expected to put aside in the event of an emergency, such as needing to replace a washing machine.

Can you have disposable income with an IVA?

Your initial IVA proposal will make you pay 100% of your disposable income into the IVA.

But over the course of the IVA, you might be able to keep some of your disposable income as long as it is within the additional income threshold.

What is the additional income threshold?

The additional income threshold is the amount of extra income you can earn without having to contribute it to your IVA. Once your IVA is approved and set up, your IP should tell you what your additional income threshold is.

You might get additional income by working overtime or receiving a bonus or commission from your employer. You might even start a second job.

What is the 10% rule for IVA?

Your additional income threshold is usually set at 10% more than what’s in your initial IVA proposal.

For example, if you usually earn £500 per week, but one week you worked some extra hours and earned £545, you would be allowed to keep the extra £45 because it’s within your 10% additional income threshold.

In this situation, you wouldn’t be forced to pay all of your disposable income into the IVA. You could instead spend the money on something other than essential living expenses, or you could save the money along with any other additional income you earn below the 10% threshold.

What happens if your income increases?

If your regular income increases due to a pay rise or a promotion, you must tell your IP immediately. Don’t wait for your next IVA review to disclose increased income.

Similarly, if you inherit money or come into money due to a windfall, you must also tell your IP immediately.

Your IP will then recalculate your regular income and adjust your monthly IVA payments so you pay more. It can work the other way as well if your income decreases. You might be able to get your IVA payments decreased.

What happens if you don’t tell your IP about higher income?

Failing to disclose an increase to your regular income to your Insolvency Practitioner is serious. You will have broken some of the conditions of your IVA, which could then result in the IVA failing.

What is a failed IVA?

An IVA fails if you breach any of the conditions within your IVA agreement. The most common reason an IAV fails is when debtors don’t keep up with repayments. Another reason an IVA fails is when debtors conceal additional income from their IP.

When an IVA fails, your creditors can take court action against you to make you pay the debt. They can even petition to make you bankrupt. It’s best to avoid this situation. Speak with your IP if you’re struggling to keep up with payments.

Can I go on holiday while on IVA?

There’s nothing legally stopping you from physically going on holiday in the UK or abroad when you’re using an IVA. But you might not be able to go on holiday due to the cost.

You will be able to go on holiday while on an IVA if:

The holiday was already fully paid for before the IVA started
Someone else has offered to pay all of the expenses for you to go on holiday
You have managed to save up additional income and use the money to pay for a holiday, which can be difficult and unlikely due to the significant expense of a holiday

Note, there is a big difference between someone offering to pay for your holiday, and someone offering to borrow you money to pay for your holiday. The latter can result in a failed IVA.

Can you get a loan while on an IVA?

There are usually restrictions that stop you from taking out any credit while on an IVA without getting written permission from your IP first. Sometimes you can apply for credit up to a small amount without getting IP permission.

However, it can be very difficult to get any amount of credit while using an IVA because lenders will consider you a high lending risk.

Can you buy a car with an IVA?

You will only be able to purchase a car while on an IVA if you manage to save small amounts from any extra income accumulated within the additional income threshold. This could be impossible unless you buy a cheap car.

On top of this, your IVA might not factor in the costs of running a vehicle, including servicing and fuel costs. So getting a car is likely to be very difficult while on an IVA.

Can you get car finance with an IVA?

Because buying a vehicle outright is almost impossible on an IVA, many people ask whether it’s possible to get a vehicle on finance. Just like Woodster2524 asked on an online forum here:

Source: https://forums.moneysavingexpert.com/discussion/comment/76896681#Comment_76896681

The forum poster has been having difficulty getting approved for any type of finance to get a vehicle. This is quite common.

Many finance companies don’t accept people while they’re using an IVA. It can even be challenging to get a vehicle on finance immediately after an IVA due to a damaged credit record.

IVA spending restrictions (Quick summary)

IVA spending restrictions can be summarised as:

You will need to pay 100% of your regular disposable income into the IVA

Thus, you will have to live on a strict budget without being able to make luxury purchases

However, you can save a small amount of irregular additional income earned as long as it’s within your additional income threshold

Keeping these smaller payments could help you save, or you could choose to spend the money as you wish

“It will only get worse” 😩

It’s cliché to say, but with debt it’s true; the longer you leave it, the worse the problem gets.

There are straightforward and effective ways to deal with debt, but you have to know your options.

Fill out the short form to find out about the debt solutions that could reduce your monthly payments or even write off some of your debt.