If you have been researching the various debt solutions available to you, and come to the conclusion that an Individual Voluntary Agreement (IVA) is the right one for your financial circumstances, then it is important that you fully understand how an IVA works, and how it will affect your life going forward.
One important aspect of how an IVA will affect your life is the spending restrictions that go hand-in-hand with it. You must understand that these restrictions are not put in place to punish you, or for anyone else’s gain. IVA spending restrictions are implemented to help you ensure that your IVA is successful.
What are the Restrictions?
- Credit Applications — If you would like to apply for credit, you will have to ask your Insolvency Practitioner for permission. They will take a fresh look at your finances, and let you know whether or not you will be allowed to apply. However, we highly recommend that you do not take out any more debt while in an IVA. You should also note that your application may be rejected anyway.
- Windfalls — If you receive a financial windfall, like a lottery win or an inheritance, you will not be able to spend this at will. You will have to inform your Insolvency Practitioner, and pay some of the money into your IVA before choosing what to do with the rest.
- Restricted banking — You will not be permitted to have a bank account with an overdraft, and if you have any other debts with your bank, your existing account may be frozen. You will still be able to open new bank accounts that do not allow you to make more debt.
- Restricted budget — You will need to be able to prove to your creditors that you are living within your means during your IVA. Your Insolvency Practitioner will carefully assess your income and expenditure, and create a realistic budget based on the guidelines approved by your creditors, and you will be expected to stick to this budget for the duration of your IVA, unless it is reviewed and changed by your Insolvency Practitioner.
Your IVA providers will not be able to access your bank accounts, and they will not be constantly monitoring your spending. Each year, a review of your income and expenditure will be undertaken by your Insolvency Practitioner. You can also request a review at any time if you have a change in circumstances, and find that your budget no longer suits your situation.
The reviewers may request copies of your bank statements, so that they can validate any expenditure items that they are unsure of. If you are struggling to make your IVA payments, but nothing has really changed, it may be that you are not living within your prescribed budget, and the first thing to do is to take a close look at your spending – was your original budget realistic? Bear in mind however that your creditors will expect you to make some sacrifices as they are agreeing to write off a portion of their debt.
How do the IVA Payments Fit Into the Budget?
Should you take out an IVA with our help, Debt Movement’s Insolvency Practitioner will ensure that your monthly IVA payments are only as much as you can reasonably afford. They will work with you to assess your income and expenditure, and you must be sure to include absolutely everything you need to pay or buy each month. Your monthly IVA payment will be whatever is left of your income after your bills and essential spending have been deducted, taking into account the creditor guidelines.
In other words, every penny you earn will be accounted for, and you must only spend money on essential items. This budget will be in place for the entire 5 to 6 years of your IVA, so bear this in mind when choosing a debt solution.
How Does Additional Income Affect My IVA?
Once your IVA has been approved, your Insolvency Practitioner will use your current income to work out an “additional income threshold”. These are set at 10% more than your current income. Anything earned above this amount will need to be reported to your Insolvency Practitioner, and 50% of that will need to be paid into your IVA for the benefit of your creditors.
For example, if you earn £1,000 per month, you would be able to earn up to an additional £100 a month without having to pay anything into your IVA. Most people choose to save this additional income over the course of the year, to afford certain luxuries, such as holidays or birthday treats. If you earn more than the 10% (£100 in this example) extra in a month, half of the excess will need to be paid into the IVA. This means you will still have the original 10%, as well as 50% of anything over that, to spend as you wish.
Can You Go On Holiday in An IVA?
There is no rule that states that you can’t go on holiday on an IVA, but you must stay within your budget at all times. If you have managed to save some money within your additional income threshold, or if a friend or family member wants to treat you to a getaway, there is nothing in your IVA that is stopping you from going.
What if I Exceed My Spending Restrictions?
You should be very careful never to miss an IVA payment, but if you do, your Insolvency Practitioner will want to review your latest income and expenditure to make sure your budget is still affordable to you. They may ask for your bank statements to check that your spending is still within limits.
If you find you are no longer able to maintain your budget, it’s important to have it reviewed to see whether it is still realistic. If it is determined that your budget is still affordable, your Insolvency Practitioner will expect you to continue your IVA payments. If your budget is no longer affordable due to changes in your circumstances – such as increase in mortgage/rent or utilities – your Insolvency Practitioner will speak to you about the other options that are available, including the possibility of asking creditors to formally agree to a reduction in your monthly contributions.
What About Emergency Expenses?
Your Insolvency Practitioner will make provisions for emergencies, such as vehicle or home repairs, when they work out your initial budget. However, you will be responsible for setting this aside each month to cover any emergencies when they occur.
If an emergency does occur and you are unable to afford the expense, or if it means you will struggle to meet your IVA obligations, be sure to contact your Insolvency Practitioner immediately. In some circumstances, they may allow you to request a reduction in your payments or a short payment holiday. Bear in mind that this could affect the length of your IVA term.
Top Tips For Getting Through An IVA
There is always a silver lining to every difficult situation, and an IVA is no different. People who have been through an IVA often report that they have learned a lot about managing money, and have come out the other side as knowledgeable, financially independent money managers.
Use these tips to make the most of your IVA experience:
- Communicate with your Insolvency Practitioner — Your Insolvency Practitioner is there to help you succeed, so be sure to ask plenty of questions and keep them up to date with any changes in your circumstances.
- Learn budgeting as a new skill — You may be surprised by how rewarding it can be to successfully live on a budget! Have fun creating spreadsheets, researching cheaper energy providers, and looking for broadband deals. Read our budgeting blog for some useful tip Budgeting and money management are an important part of life, and learning them will put you in excellent stead for life after your IVA.
- Use the time to reflect — An IVA is only active for five or six years, which isn’t a lot of time in the grand scheme of things. Let the experience teach you about your previous money management pitfalls, and how to improve.
- Continue your good habits after the IVA — After your IVA is complete, rather than increasing your overall spending each month to absorb the extra money, consider opening a savings account and putting it away each month. This will help you save for things like large appliances, holidays, and Christmas.
Debt Movement’s friendly and professional guides are always available to talk you through the process and help you on the road to financial freedom. If you are considering an IVA, or already have one with us but are struggling with the financial restrictions, call us today.
