If you’ve looked into all debt solutions and decided that an Individual Voluntary Agreement is right for your finances, it’s crucial to understand how IVAs work as a debt solution. IVA spending restrictions can actually be a good thing in the long run.
A common concern among those subject to IVA spending restrictions. It’s important to understand that these aren’t meant as a punishment or for anyone else’s benefit, but are instead designed with your success in mind.
IVA restrictions include:
- Applying for credit —You must have your Insolvency Practitioner’s (IP) permission to apply for credit during an IVA. The IP will reassess your finances and let you know whether or not you can afford it; however, it is generally discouraged to take on more credit while in an IVA as the likelihood of being approved (and credit rating) is quite low.
- Restricted budget — To convince your creditors that you’re worthy of their trust, you’ll have to show them living within your means with reasonable living expenses. Your IP will evaluate your income and spending objectively to budget accordingly and in a way that is palatable to creditors.
- The windfall clause — If you come into a large sum of money, such as from winning the lottery or an inheritance, you have to tell your insolvency practitioner (IP) and put that money towards your Individual Voluntary Arrangement (IVA).
- Restricted banking — If you have an overdraft with your current bank, they may freeze your account. However, it’s easy to open another bank account with a different bank.
Your IVA provider cannot access or monitor your bank accounts unless you ask for a review of your income and expenditure, which will take place yearly or when there is a change in circumstances. They may request copies of some bank statements to confirm certain items included in your expenditures. Another way to tell if you’re not following the budget is if you have difficulty making payments on time.
Your IVA Payments and Budget
Our Insolvency Practitioner will work with you so that your monthly repayments are always affordable. You must include everything when assessing your income and expenditure with them. Your monthly payment will be deducted from your income after bills and essential spending have been taken care of.
In other words, every penny will be accounted for putting only towards essential items. This means no spending on luxuries or unnecessary purchases until the budgeted time is up – usually five years. Please note you would not be allowed to take any further credit usually.
Always remember that the budget is designed to help you become financially independent. Following the budget and all other terms and conditions of your IVA will ensure that you can have a fresh start after your IVA period ends.
Additional Income Threshold
Your income and expenditure will be used to calculate an extra earnings limit once your IVA is registered and approved. This is generally 10% more than what you make now, which will help you understand how much money you can bring in before needing to tell your IP and pay that sum into the IVA.
For instance, if your monthly salary is £2,000, you can earn an extra £200 without having to put any of it towards your IVA. Most people tend to save this money over the course of a year in order to later afford nicer things–such as holidays or special gifts for birthdays. However, anything earned above 10% (£200 in this example) will have to be split 50/50 between going into the IVA and being available for you to spend however you please as spare income.
Holidays during an IVA
IVA budgets may appear strict, but they help you stay focused on completing your IVA and becoming debt-free. However, there’s no law saying you can’t go on holiday as long as it fits into your budget. As mentioned before, maybe you saved up money within your additional income threshold, or perhaps a friend or family member is taking you.
What Happens if You Go over Spending Restrictions?
If you start to miss your IVA payments, your Insolvency Practitioner will likely ask to reevaluate your income and expenditure first, checking if the budget is still manageable for you. Additionally, they might request bank statements as proof that you’re not spending too much money on items considered luxury or nonessential.
It is essential to check the realism of your budget if you find that you are unable to stick to it. Your Insolvency Practitioner will want you to continue making payments into your IVA if it appears as though your budget can handle it. Remember that creditors have set guidelines regarding what kinds of things you are allowed to spend money on. This is necessary for there to be a fair balance between creditors and you–after all, creditors will be writing off part of their debt if the IVA goes through successfully.
What if There Is an Emergency Expense?
Each month, your IVA budget will set aside funds for emergency situations such as car repairs or home damage. However, it is your job to manage this money so that you can afford these emergencies when they pop up. If an unplanned event happens and you cannot handle the cost or meet your IVA requirements, reach out to your IP right away. Depending on the situation, you might be able to request a reduced monthly payment or a payment holiday. It’s important to remember that changing the terms of your IVA could impact how long it lasts overall.
Top Tips For Living In An IVA
An IVA, or an individual voluntary arrangement, doesn’t have to be restricted and can actually provide some financial benefits. People who have been through the process of getting an IVA often find that they come out as knowledgeable money managers and are able to become financially independent.
Here are a few tips to making the most of your time within an IVA:
- Communicate with your Insolvency Practitioner — The purpose of an IVA is to help you become debt-free. Maintain clear communication with your provider, ask questions, and update them on any changes in your circumstances. Doing so will greatly improve the chance that you’ll successfully complete your IVA.
- Take the time to reflect — An IVA is a beneficial solution for those struggling with debt. You will have your financial freedom back in only five to six years! During this time, think about your previous money management decisions and how you can avoid making the same mistakes in the future.
- Take budgeting to the next level — Living on a budget does not have to be daunting! There are many creative ways to save money. You can make it fun by challenging yourself to see how much you can save each month. Set up a budget spreadsheet, track your progress and look for new ways to cut expenses. You may be surprised at how much enjoyment you get from living frugally!
- Continue good habits – You’re probably used to making monthly payments towards your debts while you were in your IVA. Instead of spending that money now, open a savings account and put away the same amount each month. This will help you save for things like large items, holidays and Christmas. This will also increase the rating on your credit file.
At Become Debt Free, we understand that money troubles can feel like a heavy burden to carry. Our guides are here to help lift some of that weight off your shoulders by speaking with you about your unique financial situation and creating a plan tailored specifically for you. If an IVA might be the right solution for you, please don’t hesitate to give us a call today for debt advice at 0800 169 1536 or leave us an enquiry on our website.
