When talking to people who are struggling with serious debt, I often come across people whose sole income is derived from benefits. Legally speaking, there is no reason why they this type of person should not be allowed to propose an IVA. If after considering a sensible budget, it is clear that they have a sustainable disposable income available, then this could potentially be used as the basis of an IVA proposal.

However, an IVA can only be put in place if the proposal is accepted by creditors. Over the past 18 months, many commercial banks have taken the view that it is not morally correct for someone whose sole income is through benefits to carry out an IVA. The argument is that benefits are means tested and designed to pay for a reasonable cost of living but do not include extra funds for the repayment of debt.

But is this an appropriate approach? The IVA solution is a matter of government policy and an article of English law (the Insolvency Act of 1986). As long as the solution is appropriate and meets the creditor’s financial criteria, it should be the choice of the individual whether they use it regardless of their personal social standing.

The banks take what they say is the moral ground, but it is the banks that have permitted people with benefit income to borrow in the first place – it was not a moral issue at that time. Surely people on benefits should be given the same options as everyone else to resolve their debt problem. After all, if not IVA, then what? A Debt Management Plan will require monthly payments in the same way as an IVA – if the argument is that benefits money must not be used to pay for debt, the Debt Management plan is also taboo.

Given this, we can only assume that those on benefits will be driven by their creditors to declaring bankruptcy, which is surely in no-one’s best interest. My personal view is that IVAs for people whose sole income is benefits should not be dismissed.

The IVA is not a Get Out of Jail Free Card

Reading some of the recent press, you could be forgiven for thinking that the IVA is a slightly underhanded get out of jail free card for people who get into debt. After all, the ads we all see on our TV screens and on the radio suggest that the IVA is a straight forward way of paying off what you can afford over a 5 year period and then simply getting away with any remaining debt being written off. Beware this is definitely the false impression. The IVA is by no means an easy option.

The fundamental which is so often overlooked is that an IVA is NOT a way to wriggle out of paying debt. It is a sensible managed process to pay back as much debt as possible to creditors over a fixed period of time – normally 5 years. As such, the goal is to ensure that creditors are given the best possible opportunity of getting their money back.

To make sure that as much money is paid back as possible, when carrying out an IVA, you will have to live within a very tight living expenses budget which must be agreed by your creditors. This is not going to be a walk in the park and generally you will have to stick to this budget for 5 years. On top of this, if you come into extra money during this period or start to earn more money through promotion or a change in job, you will generally have to pay more to your creditors. On top of a tight budget, if you are a home owner, it is likely that you will have to release equity from your property as part of your IVA settlement.

My intent here is not to be too negative. The IVA is a real solution to resolving a serious debt problem. However, the important message here is that the decision to enter into an IVA must not be taken lightly.  It is most certainly not an easy way of simply getting out of paying debt. However, if you stick to the IVA agreement and manage your budget to ensure your agreed monthly payments are met, you will have light at the end of the tunnel and your debt problem will be a thing of the past.

Over the past 18mths – 2 years there is no doubt that when considering IVA applications, Banks have considerably reduced the amounts that they will allow as acceptable and reasonable living expenses. Some banks now feel that £150/mth housekeeping is reasonable for a single person. £35 per week for all food, clothing personal and cleaning products. This budget has to be sustained for 5 years. 

Very often, someone who wants to get into an IVA is so desperate to get their debts sorted out that they will agree to any demands that their creditors make of them. However, saying yes to an unreasonably low living expenditure budget will cause problems down the road. More and more people are getting 6-12 months into their IVAs and finding that they can not afford to maintain the payments.

Of course, people going into IVAs must make sure that they live within a sensible budget. This is only fair and reasonable as it will mean quite rightly that they pay back as much as they possibly can. However where creditors make unreasonable demands on limiting expenditure, this will lead to big problems later. Unless there is allowance for a sensible standard of living while someone is in an IVA, the creditors themselves will force debtors into bankruptcy. This is definitely a loose situation for the banks.

Incidentally in bankruptcy the Official Receiver’s office seems much more willing to allow higher and sustainable expenditure budgets. Perhaps creditors should look to the Official Receiver’s office to understand what is required for a reasonable standard of living in todays world.