When you offer creditors an IVA proposal, they will carefully consider if your offer of payment is fair. They will look at your income and your household expenses and take into account any special family circumstances that may impact on your ability to make your debt repayments, such as a family member having a medical condition with special medication, dietary or care needs.
Amendments to an IVA Proposal
If your IVA is based on making 60 monthly payments, creditors may request to increase the amount you have to pay each month, if they consider your monthly expenses to be overstated or your income understated or if any of your expenses are set at an exorbitant level in your proposal. For example, if you claim £200 per month in smoking expenses in your proposal, lenders may deem this excessive and request to cut this back to about £60 per month and seek to increase your payments by the difference. If you want your IVA to be accepted, you may have to agree to such an uplift in your payments which clearly requires you to cut back on your smoking. This type of request is known as a known as a modification.
IVA Proposal Modifications
It is common for creditors to apply modifications to your proposal at the meeting of your creditors. They also usually apply a standard modification requiring your IVA supervisor to carry out an annual review of your income and expenditure in order to ensure that a fair portion of any additional net disposable income which you earn is contributed to the arrangement. Given the length of time of an IVA, this is a fair and reasonable approach.
In an annual review, if your financial circumstances change for the better, then creditors would expect your monthly payments to them to increase. For example, you may be promoted at work, secure a better job, or obtain additional benefits from one year to the next. This would increase your household income. Or you may have been able to reduce your household living expenses.
Types of modification
One standard modification reads as follows:
‘Where net income has increased, including any routine overtime, the debtor shall increase contributions by 50% of the net surplus, after taking into account costs of living, commencing in the month after review.’
So what does this mean?
Assuming you get a pay increase and your regular take-home pay increases by £500 per month, while at the same time your household costs increase by £150 per month, then your net surplus income would have increased by £350 per month. Creditors would expect you to contribute half of this net additional amount of £175 to your IVA every month.
Your household would also enjoy an improvement in its standard of living to the extent of £175 per month.
It is your IVA supervisor’s job to make sure that the payments are increased accordingly.
The IVA Annual Review
About four to six weeks before your annual review is due, your supervisor will send you an income and expenditure form, showing the figures last used in the previous year. You will be asked to read over and update any new income and expense figures. When you have completed the form, you need to return it with a copy of your most recent P60 and copies of your recent pay slips. Your supervisor will review these figures, calculate any increases in your monthly contributions and agree these figures with you. Your annual review is then circulated to creditors showing any changes.
What about overtime, bonus or commission that earned during the previous year?
One standard modification reads as follows:
‘The debtor shall report any overtime, bonus, commission or similar to the supervisor if not included in the original surplus calculation and where the sum exceeds 10% of the debtor’s normal take-home pay. Disclosure to the supervisor will be made within fourteen days of receipt and 50% of the amount, over and above the 10%, shall then be paid to the supervisor within 14 days of the disclosure. Failure to disclose any exceptional overtime, bonus, commission or similar by the debtor will be considered a breach of the arrangement and the supervisor shall notify the creditors in the next annual report with proposals for how the breach is to be rectified.’
Below is an example that illustrates how this modification works:
Let’s suppose that your normal take-home pay is £2,000 per month and you receive a one-off bonus of say £500 net. Then that month’s take-home pay would have increased by 25%. The first £200 of your bonus, 10% of normal take-home pay, would not be touched and 50% of the balance of your bonus would have to be contributed to your IVA. So you would have to contribute a total of £150 extra to your IVA for that month only and would be allowed to keep the remainder of your bonus amounting to £350.
Making such increased monthly contributions to your IVA does not reduce the term of your IVA. You will still have to keep on paying for sixty months. It just means that you will be repaying a greater percentage of your debts to your creditors and they will receive a greater dividend than originally estimated when you made your initial IVA proposal.
Supervisors have a duty to ensure that payments to the IVA are made in accordance with the agreed terms and conditions as accepted at the meeting of creditors, including modifications.