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Making sure that you agree the correct level of living expenses can make the difference between the success or failure of an IVA. We investigate what expenses are acceptable to creditors.
Every month, thousands of people start an individual voluntary arrangement (IVA) to deal with their debts.
In an IVA, monthly debt repayments are reduced to fit within a single affordable monthly payment which you pay for normally no more than five years.
At the end of this period, any outstanding debt is written off and you are left to get on with your life free of unsecured debt.
No access to credit
One of the key principles to doing an IVA is that you will no longer have any access to unsecured credit. This means that all overdraft and credit card facilities are cancelled.
You must therefore ensure that have properly calculated your living expenses to make sure you have enough to pay all of your essential household bills without using any credit facilities.
The way to do this is to first list all of your expenses on paper or in a spreadsheet.
Expenses should be reasonable You are allowed to include all of your living expenses as long as they are reasonable. Of course the question is always "What is reasonable?"
Some of your expenses such as rent, mortgage payments, council tax and utilities are fixed. As such, you simply record these as they are within your expenses budget.
However, other things such as food, clothing and transport costs are variable and will depend on your specific circumstances and how many people are in your household.
You should always start by using the prescribed guidelines as the basis for these expenses.
Also include expenses which are allowed within the guidelines which you do not necessarily need each month such as amounts for car servicing and the dentist, opticians and prescriptions.
Variations to the guidelines
Very often you may feel that the guidelines for your variable expenses such as food look too restrictive.
If this is the case, you can always use figures which are greater than those prescribed as long as you can justify them. For example, if you have special dietary requirements which are more costly, it is reasonable to include these with an explanation of why you need them.
In the same way, if you have a particularly long commute to work, you may need to spend more on car petrol. This is reasonable as long as you can justify it.
If you believe that you spend much less that the expenditure guidelines suggest, there is no problem but perhaps surprisingly you will also have to justify the reduction.
This is because if your living expenditures look too low, your creditors will be concerned that your budget is not sustainable. If this is the case and you can then not afford to make your IVA payments, your IVA could fail.
Make sure you feel comfortable
When calculating your living expenses, always try to put yourself in your creditor's shoes. Remember, in proposing an IVA you are asking them to write off debt for you.
If it was you who was owed money, ask yourself, "Would you be happy to do this based on the expenses that you say you need to live on?"
Ultimately, the most critical thing to remember is that you should not agree to an IVA unless you are happy that you can live within the expenses budget agreed.
If you are not comfortable with the budget suggested or your creditor's demand reductions in some of your proposed expenses which you feel you will not be able to afford, then you should think seriously about cancelling you IVA proposal and choosing an alternative debt solution.
In the long run, this would be a far better option than struggling to pay an IVA that you cannot afford. This will often result in the failure of your IVA which would simply be a waste of time and money.
About this Author
James Falla is a debt adviser from BeatMyDebt.com in the UK. For more quality and unbiased information on Individual Voluntary Arrangements, visit our website at www.beatmydebt.com
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