Person not adhering to IVA spending restrictions

What Are IVA Spending Restrictions?

If you have looked at all of the debt solutions available to you and believe 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.

One of the aspects many people worry about is the IVA spending restrictions. The first thing that you need to know about the restrictions is that they are not there to punish you or for anyone else’s gain. IVA spending restrictions are put in place to help you to ensure that your IVA is successful.

IVA restrictions include:

  • Applying for credit — If you would like to apply for credit, you must notify your Insolvency Practitioner (IP) and ask for permission. Your IP will take a look at your finances again and let you know whether or not you can. It is, however, highly recommended that you do not add more credit when in an IVA and the likelihood of being accepted for more credit is very low.
  • The windfall clause — If you receive a financial windfall, like a lottery win or inheritance, you are required to inform your IP and pay into your IVA.
  • Restricted banking — You will not be able to have a bank account with an overdraft and if you have other debts with your bank, it may be frozen. You can easily apply for another account with another bank though.
  • Restricted budget — You will need to be able to prove to your creditors that you are living within your means. Your IP will carefully assess your income and expenditure and create a realistic budget in line with guidelines approved by creditors. If you are looking to create your own budget, you can download our FREE personal budget tool in Excel here

Your IVA providers will not be able to access your bank accounts and they will not be constantly monitoring your spending – a review of your income and expenditure will take place each year or whenever you have a change in circumstances and request a review. They may ask for copies of your bank statements to validate some of your expenditure items. A key indicator that you are not living within your budget is when you struggle to make your IVA payments. 

Your IVA Payments and Budget

Debt Movement’s Insolvency Practitioner will ensure that your monthly IVA payments will never be more than you can reasonably afford. They will work with you to assess your income and expenditure, so you must be sure to include everything. Your monthly payment will be whatever is left of your income after your bills and essential spending have been deducted.

This means that every penny will be accounted for and you must only spend on essential items. You cannot spend on luxuries or unnecessary purchases. This budget will be in place for the entire duration of your IVA, usually around five years. 

Keep in mind that the budget is in place to help you towards becoming financially free, so sticking to the budget and adhering to all of the terms and conditions of your IVA spending restrictions will mean that you can look forward to a fresh start at the end of your IVA.

Additional Income Threshold

Once your IVA is registered and approved, your IP will use your income and expenditure to work out an additional income threshold. This will usually be around 10% more than your current income and will help you to understand how much you can earn before having to report it to your IP and pay it into your IVA.

For example, if you earn £1,000 per month, you can earn an additional £100 without having to pay anything into your IVA. Most people save this additional income over a year to afford certain luxuries, such as holidays or birthday treats. For anything earned over the 10% (£100 in this example), half of it will need to be paid into the IVA. Leaving you with the other half to spend as you see fit.

Holidays during an IVA

IVA budgets and spending restrictions can seem strict, but they are there to help you stay on track to completing your IVA and becoming financially free. However, there are no rules to say that you cannot go on holiday, as long as you stay within your budget. As mentioned previously, you may have saved money within your additional income threshold, or maybe a friend or family member is treating you to a breakaway. 

What Happens if You Go over Spending Restrictions?

If you begin to miss IVA payments, your Insolvency Practitioner will initially request to look at your income and expenditure again to check if your budget is still affordable to you. They may also request bank statements to ensure your spending is within limits and that you are not spending on items classed as luxury or unnecessary.

If you are unable to maintain your budget it’s important to check if it’s realistic. Where your budget appears to be affordable, your Insolvency Practitioner will expect you to maintain payments into your IVA. Bear in mind that there are guidelines set by creditors regarding certain items of expenditure. This is to strike a fair balance between you and your creditors as they will be writing off a portion of their debt if the IVA completes successfully. 

What if There Is an Emergency Expense?

When your IP works out your budget, they will make provisions for any emergency spending such as vehicle repairs or home repairs. However, it is your responsibility to set this aside each month to cover any emergencies when they occur. If an emergency occurs and you are unable to afford the spending or will struggle to meet your IVA obligations, contact your IP as soon as possible. In certain circumstances, you may be able to request a reduction in your payments or a payment holiday. Keep in mind that this may affect the length of your IVA term.

Top Tips For Living In An IVA

An IVA doesn’t have to be restricted and can have a silver lining. People who have been through an IVA can find that they have learned a lot about how to manage their money and have come out the other side as a knowledgeable money manager and financially independent.  

Here are a few tips to making the most of your time within an IVA:

  • Communicate with your Insolvency Practitioner — They are there to help you succeed in your IVA. Keep open lines of communication with them, ask questions and keep them up to date with any changes in your circumstances. This will significantly increase your likelihood to complete your IVA and become financially free.
  • Take budgeting to the next level — You may be surprised by how enjoyable it can be to live on a budget and find new ways to save money! Immerse yourself in the budgeting process, create spreadsheets, research cheaper energy providers and broadband deals. You can find some great tips in our budgeting blog. Making budgeting and money management a part of your routine will put you in excellent stead for life after your IVA.
  • Take the time to reflect — An IVA is only five or six years. In the grand scheme of things, this isn’t a lot of time considering the outcome will give you back your financial freedom. Take this time to reflect on your previous money management pitfalls and how you can improve. 
  • Continue good habits – Whilst you have been in your IVA you have been used to making payments each month towards your debts. Once this has finished, instead of increasing your overall spending each month by this amount, consider instead opening a savings account and putting the same amount of money away each month. This will help you save for things like large items, holidays and Christmas.

Debt Movement’s friendly and professional guides are always happy to talk you through the process and help you to understand the best next steps to get 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.

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