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Receiving a windfall is an exciting experience, and in most cases, it means you can do that DIY work you’ve been putting off or treat yourself to a luxury holiday and new car. But for people in a legally binding Individual Voluntary Arrangement (IVA), a windfall can impact their IVA payments and leave them – and their creditors – in no man’s land.
In this guide, we’ll discuss what’s classed as a windfall and how your insolvency practitioner might handle a sudden increase in your income.
What Is a Windfall?
A windfall is an amount of money you receive that isn’t a part of your regular sources of income. While very rare, you could receive a windfall in the form of a lottery or competition win, but for most people, it’s usually an inheritance or a redundancy payment.
Other windfalls can be an insurance payout or a significant cash amount gift from a family member or friend. Most windfalls are unexpected, and as they’re not a part of your normal income, you might think your improved situation won’t affect your IVA.
Unfortunately, a windfall will impact your arrangement in many ways. Let’s take a look at them.
How An Insolvency Practitioner Views Windfalls
Windfalls are almost always unplanned, and most practitioners will recognise that you had no idea you’d be receiving a lump sum, but that doesn’t mean you’ll be able to keep the money.
Most IVA contracts have a set of written clauses, which protect both you and your creditors. As you owe money to people, your creditors will expect your insolvency practitioner to put any funds from a windfall into your IVA.
This means that you have a legal obligation to use your windfall for repayments, allowing your creditors to recover your debt quickly.
How Does This Impact Your Monthly Payments?
If you have an IVA and receive a windfall, you’ll have to put all the money into your payment plan. Unless it’s a large amount of money, you’ll still have to continue with your monthly payments.
For example, say you owe £15,000, and you receive a windfall of £10,000. You’ll immediately reduce that debt to £5000 and continue to pay off the outstanding amount until your IVA is complete.
While this can be beneficial because it relieves you of debt quicker, some creditors might request that you pay interest for the remainder of your IVA – even if the windfall clears you of debt.
Suppose your windfall is enough to pay off the entire IVA, interest and insolvency practitioner fees. In that case, you’ll receive a certificate of completion, and anything left from the windfall will be transferred back to you.
Are There Any Windfalls That Won’t Effect My IVA Payments?
Your Individual Voluntary Arrangement has a strict set of rules that both you and your creditors have to follow. For example, creditors cannot contact you as long as you keep up with your minimum payments, and you’ll have to notify your insolvency practitioner about any cash lump sum you receive.
The windfall clause states that you must be honest and upfront. Otherwise, you can breach your agreement and will have to pay back the total amount with interest.
Luckily, your IVA agreement might state that certain windfalls cannot be included in your IVA. Lottery wins and inheritances almost always become part of the IVA, but redundancy and insurance payments could be excluded depending on your circumstances.
If you’re made redundant, you’ll need the money to cover your daily expenses while you search for a new job, so your insolvency practitioner will take your financial circumstances into account.
Any insurance payout that falls under the critical illness or personal injury category could be exempt from your IVA. Your insolvency practitioner will look at how much your treatment will cost and factor in your ongoing medical expenses.
With any windfall, your personal circumstances will define whether or not you’ll have to add the cash amount to your agreed payments and end your IVA early. It’s best to understand the clauses in your agreement when you first agree to a proposal with your IVA company.
Knowing where you stand in the event of unforeseen circumstances means you can plan ahead. While some people don’t like to lose control over their finances, the quicker you pay off your unsecured debts, the sooner you can rebuild your credit rating.
If you’d like some free debt advice, please don’t hesitate to contact our friendly team. We’re members of the Insolvency Practitioners Association and can help you manage your creditors and regain your financial freedom.