After the VAT increase in January can I reduce my IVA payments?
22 December 2010
James Falla (about the author)
VAT will increase by 2.5 percent in January and push up the cost of many monthly living costs. We consider whether you will be allowed to reduce your IVA payments to compensate.
The increase in VAT in January will mean that many everyday living expenses increase by 2.5 percent.
Significant monthly costs such as running a car including petrol and servicing, clothing, communication including telephone and TV and some food items will all become more expensive.
If you are currently in an individual voluntary arrangement (IVA), the overall effect will be that it will become more difficult to stick to your monthly living expenses budget and you may find that you start struggling to maintain your monthly IVA payment.
Reducing IVA payments
If you start to struggle financially, you must not simply reduce the amount you are paying into your IVA.
This would be seen as breaking your IVA agreement and may cause it to fail completely.
To make any kind of permanent reduction to your payments, you must first agree with your insolvency practitioner (IP) that you can no longer afford the amount you are paying and by how much your payments should reduce.
Your IP is then required to formally propose the payment variation to your creditors. If the majority agree then your new reduced IVA payments can begin.
Significant change in circumstances
Unfortunately, your IP will normally only consider proposing a reduction of your IVA payments if your circumstances have significantly changed. For example if you have lost guaranteed overtime or your wages have permanently reduced.
You will not normally be allowed to change your monthly payments simply because the cost of living has increased.
The problem with this is that an IVA living expenditure budget does not normally allow any budget to compensate for increasing living costs. As such, it will be difficult for many people to simply absorb these increases.
Unfortunately this situation could therefore well result in many people struggling to continue maintaining their IVA payments.
If you feel you cannot continue to make your payments but your IP or creditors will not agree to reduce them, then an option open to you is to stop your payments altogether and allowing your IVA to fail.
Before considering this, you must understand that it is a serious step to take particularly if you are a home owner.
If you are a homeowner with equity in your property and your IVA fails, your IP will normally be required to make you bankrupt and sell your property to release the equity for your creditors.
If you are not a home owner or your home has little or no equity, your IP will not normally petition for your bankruptcy.
However, your total unpaid debt will remain outstanding so you will have to decide yourself how to manage it from now on. You could consider a debt management plan or making yourself bankrupt.
Of course a debt management plan will mean continuing to make payments that you can afford to your creditors until your total debt is repaid. At this stage, many non homeowners therefore choose the bankruptcy option as they feel that they have nothing more to lose and their debt will be cleared far quicker than using a DMP.
Payment reductions unlikely
Generally speaking, if the cost of living increases because of a situation such as an increase in VAT, you will not simply be allowed to reduce your monthly IVA payments.
The majority of people in IVAs will therefore simply have to manage by reducing their spending elsewhere. This will not be an easy task as IVA living expenditure budgets are already extremely tight.
If you find that you are really struggling then you must discuss the situation with your IP.
If they seem unwilling to listen at first, you could consider whether stopping your payments altogether and choosing an alternative debt management solution is a better option.
Your IP may then be forced into action. However, allowing your IVA to fail in this way could have serious consequences particularly if you are a home owner.
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