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Do benefits have to be included when being assessed for an IVA?
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Do benefits have to be included when being assessed for an IVA?

It is possible to qualify for an Individual Voluntary Arrangement (IVA) if you’re claiming benefits, as long as you can afford to put a reasonable amount towards your unsecured debts every month – and as long as the ‘owners’ of 75% of your unsecured debt agree to it. And only if your combined income (your income and your partners) is in excess of £800 per month.

People who claim benefits to top up their income, like working tax credits, child benefits, or housing benefits, could well have a reasonable amount of disposable income.

However, people living off benefits alone are unlikely to qualify for an IVA – because they are likely to have a low disposable income.

What If my income is solely based on benefits?

If your income is solely based on benefits, then it’s unlikely that you’ll be able to successfully apply for an IVA. The benefits system provides funds for life’s bare essentials, such as rent, food and clothing and little else.

As a result, it is considered inappropriate to use benefit based incomes for the repayment of the debt, particularly through a formal debt solution such as an IVA.

An IVA is a form of insolvency for people who can no longer afford their repayments but can afford to contribute a monthly amount that their lenders find acceptable. If you’re ‘living on benefits, it’s unlikely you could do that – but there are alternatives.

If you’re claiming benefits, we could still help you to manage your debts if you’re struggling. Speak to one of our advisers to discuss your options. You could, for example, delay starting a debt solution if your situation is only temporary, and then apply for one later on if you still needed it.

If you’re in debt and you’re on a low income, then bankruptcy or a Debt Relief Order (DRO) might be more suitable. Talk to insolvency practitioners like IVA Advice. They can give you free debt advice, work out the best debt solution for you and help you put together an IVA proposal.

What criteria do I need to meet for an IVA?

Not everyone can get an IVA – there are certain criteria that you need to meet. 

Spare income

To get an IVA, you should have some spare income each month to pay your creditors, usually at least £100. Your creditors are unlikely to accept an IVA if your payments are less than that.

However, an IVA can be flexible depending on your needs and circumstances. For example, if you don’t have much spare money from your monthly income but do have something that you can sell to raise a lump sum, you may be able to pay your creditors with the lump sum.

If you decide an IVA is right for you, your insolvency practitioner will advise you on what payments to make and how you might be able to increase your spare monthly income.

Regular income

An IVA will normally only be right for you if you have a regular and predictable income. This is because an IVA depends on you making monthly payments to your creditors over a period of a few years. If your income changes from month to month, an IVA may not be right for you.

Complete a budget

Before you decide on an IVA, complete a budget to see what spare income you have each month.

If you decide that an IVA is right for you, your insolvency practitioner will need a copy of your budget.

Lump sums

You may have a lump sum of money, for example, money left to you in a will. This is likely to be included in the IVA. This means you will need to use this money to make your monthly payments to your creditors. You may use a combination of a lump sum and a spare monthly income.

If you’re over 55 and have a ‘defined contribution pension‘, you could cash in some of your pension to raise a lump sum for an IVA. However, this would leave you with less money to live on in retirement. You should get financial advice from an independent financial adviser before using your pension to pay off debt. A ‘defined contribution pension’ is based on how much has been paid into your pot, not your salary near retirement.

Assets

Assets are things you own that have significant value, such as a home, land or a car. You don’t need to have any particular assets to get an IVA but they may help you to pay your debts. Assets can be included in the IVA, which means you will sell them and use the money to pay the creditors.

If you decide that an IVA is right for you, your insolvency practitioner will discuss your assets with you and whether you need to include them in the IVA. You must tell the insolvency practitioner about all your assets. If you don’t, you will be breaking the law.

If you own a home

If you own a home, most IVA agreements include a requirement for you to get a valuation of your home in the final year. If there is equity in the property, you’ll usually need to raise a lump sum to put into the IVA by re-mortgaging your home. Equity is the money you’d make from the sale of a property after any mortgage or secured loans are paid off. You shouldn’t have to sell your home to raise the lump sum. If you think you are being asked to sell your home, get specialist advice straight away.

If you can’t re-mortgage, you’ll continue to pay the usual monthly contributions under the IVA for twelve months instead.

An IVA is a form of insolvency for people who can no longer afford their repayments but can afford to contribute a monthly amount that their lenders find acceptable. If you’re living on benefits, it’s unlikely you could do that – but there are alternatives.

Alternatives to an IVA

If you’re claiming benefits, we could still help you to manage your debts if you’re struggling. Speak to one of our advisers to discuss your options. You could, for example, delay starting a debt solution if your situation is only temporary, and then apply for one later on if you still needed it.

If you’re in debt and you’re on a low income, bankruptcy or a Debt Relief Order (DRO) might be more suitable.

A DRO is basically a cheaper alternative to bankruptcy and doesn’t involve going to court, but there are strict rules about who can apply for one because it is designed to help people in a particular situation.

To qualify for a DRO, your unsecured debt must not exceed £15,000, your disposable income must not exceed £50 per month and your assets mustn’t exceed £300 in value (although you can own a car worth up to £1,000).

A DRO is similar to bankruptcy, but it only costs £90 to apply (bankruptcy can cost £700 upfront). A DRO freezes all unsecured debt for 12 months and writes it off at the end if your circumstances haven’t improved. Bankruptcy could also write off debts after one year and there is no limit to the amount of debt that could be written off – but it will require you to make monthly payments if you can afford them.

What are the alternatives to an Individual Voluntary Arrangement?

An IVA isn’t the only debt solution available to you. There are other solutions available that might be better for you, depending on your circumstances. We’ve listed them below, but speaking to a debt advisor is the best way to find out which one is the most suitable solution for you.

Bankruptcy

Bankruptcy may be a suitable solution if you can’t afford to repay your unsecured debts in a reasonable amount of time. It takes less time to complete than an IVA does, but you could lose your home and other assets, and you will need to pass over control of your finances to the Official Receiver.

Once you are declared bankrupt, you will only have to make payments towards your debts if your Trustee decides you can afford to. If you do have to make payments towards your debts, you will start something called an Income Payment Agreement (IPA). Your payments will be affordable and take into account your essential living costs, such as rent, mortgage, utilities, food and travel expenses. Your IPA normally continues for up to three years. In most circumstances, you’ll be discharged from bankruptcy after 12 months and whatever you can’t afford to repay will be written off. If your income was made up solely of state benefits then you wouldn’t be expected to pay anything into the bankruptcy.

You should think carefully about entering into bankruptcy, though, and be aware it’s usually considered a final option if no other debt solution has worked or is suitable. As we mentioned, when you’re declared bankrupt some of your assets may be sold to repay your debts. If you’re a homeowner, this could include your property.

As with other debt solutions, it’ll be visible on your credit history for six years. This will have a knock-on effect on your ability to obtain credit during this time, and potentially beyond this period too. This is because, when you make new applications for credit, you may be asked if you’ve ever been bankrupt and your answer could result in your application being turned down. Your details will also be recorded on the Insolvency Register while your bankruptcy is ongoing and for three months after you’ve been discharged from bankruptcy.

Debt Relief Order

If you really can’t repay your unsecured debts in a reasonable amount of time, a Debt Relief Order (DRO) could provide you with a lower-cost alternative to deal with your debts, compared to bankruptcy. If you live in England, Wales or Northern Ireland and meet the strict eligibility criteria, it could be a suitable solution for you. To qualify, you need to have a limited level of disposable income after covering all of your essential living costs, which include things like your rent, food, utility bills and travel costs. To qualify for a DRO, you’d also have to show that you don’t have assets that could be used to pay off your debts. 

Once your DRO has been agreed, any payments towards your unsecured debts will be suspended for 12 months. If your circumstances don’t improve during that period, the outstanding debts that are included in your DRO will be written off.

A DRO is an insolvency solution and as such, it comes with consequences. Your credit history will be negatively affected for at least six years from the date you start it, which will make it harder for you to borrow. To qualify for a DRO, your debts would have to be less than £20,000 and you’d need to have no more than £50 disposable income every month. You wouldn’t be allowed to have more than £1,000 in assets, or a car worth more than £1,000. 

Debt Management Plan (DMP)

If you’re struggling to make your current monthly payments on your unsecured debts but you can pay something towards them, a Debt Management Plan could be the right way forward. It will allow you to continue paying them but at a more affordable rate. So, you should still have enough money to cover your essential living costs like your rent, mortgage, food, utility bills and travel expenses.

You, or a debt solution provider, can speak to your creditors and negotiate a single, lower monthly payment that’s sustainable and affordable for you. Your creditors aren’t obliged to accept these lower payments; however, providing they can see that they’re fair to both you and them, they should be willing. In terms of the interest and charges on your debts, you or your solution provider can request that these are frozen. While your creditors are not obliged to do this, in most cases they agree. 

A Debt Management Plan has consequences. For example, as you’ll be reducing your monthly repayments, which is essentially breaking the original agreement you had, a default notice will usually be issued that will show on your credit history. This will make it harder for you to obtain credit in the short to medium term, and possibly in the longer term too.

Debt Consolidation

Debt consolidation could help you repay your debts by combining them into just one regular payment, which could be at a reduced rate and/or over a longer period of time.

You’ll combine your multiple existing debts into one manageable monthly payment, rather than having to make individual payments to each of your lenders each month, and it could reduce the amount you pay each month too.

It’s important to remember that if you choose to pay back what you owe over a longer time period, this may mean you’ll be paying interest for longer and you could therefore end up paying more in the long run.

Would you like to discuss your debt solution options?

IVA Advice is a registered Insolvency Practitioner (IP), we support our clients to manage their debts and repay creditors. From the initial debt advice to drafting an IVA proposal and securing a legally binding agreement, we can help you manage your obligations.

Our friendly team is available to discuss various debt solutions and share information on how an IVA affects your finances. Please feel free to contact our registered office today, and we’ll help you manage your creditors and relieve the weight of debt that’s holding you back.