Still, such good news may lead to confusion if you have an Individual Voluntary Arrangement (IVA). Must you disclose the increase, and if so, how will the extra money affect your IVA debt repayments? What will happen if you fail to disclose income changes?
In this article, we answer all your questions about your duty to report changes in circumstances. We’ll also explain how increases, bonuses and overtime can affect your debt repayment responsibilities, and just as importantly, when they won’t affect your monthly payments.
IVA Basics
An IVA offers highly indebted people a controlled way out of an unmanageable situation. It is a legally binding agreement in which you agree to pay your creditors an affordable monthly amount over a period of five or six years. During that period, a licensed Insolvency Practitioner (IP) supervises the repayment of debts.
After obtaining agreement from your creditors (75% by value must agree), your debts are brought into a single structured monthly repayment. The IP distributes the funds among the creditors, so you no longer have to deal with them.
The IVA releases you from the burden of having to juggle multiple debt repayments, and your creditors agree not to pursue any further action or add any additional fees or interest to the amount owed. Any remaining qualifying unsecured debt is written off at the end of the period.
Monthly Debt Repayments
The debt repayments are based on what you can reasonably afford, taking into account your income and essential living expenses. Essential living costs include your rent or mortgage payments, utilities, food, transport, childcare and any other expenses that are deemed essential.
Your Insolvency Practitioner will review your income and expenses at least once a year. The aim is to keep repayments fair and reasonable. The IP will check whether you are still paying a reasonable amount given your current circumstances over the review period. This means that, if the numbers support it, your debt repayments may go up or down during the IVA term.
The IVA is protected for as long as you stick to the agreed-upon payments and keep your supervisor informed of any income changes. The system is built around fair, flexible and manageable payments, so if you get a new job or you’re promoted, your IP must reassess your debt repayments.
What is a ‘Change of Circumstances’ in an IVA?
Your IVA debt repayments are based on your disposable income, and the assumption at the start of the agreement is that your financial situation will remain broadly stable. Still, things don’t always work out that way. This is why the agreement includes rules requiring you to report any change in your circumstances. These changes can affect your payment to the IVA, and informing your supervisor prevents any nasty payment surprises later.
A job change, a promotion or a pay increase, even a small one, is a reportable change. Over time, bonuses, seasonal work, commission, or a second income from part-time jobs or freelancing also fall into the category of reportable changes. You must declare these earnings even if they aren’t guaranteed each month.
Income reductions are equally important. You must report any loss in earnings to your supervisor immediately. These income losses can result from a drop in working hours, a job loss or statutory sick pay. Armed with this information, your IP could adjust your payment or request a change to prevent your IVA from failing.
Household budget changes can also make a difference. Increased rental expenses, for example, can have a significant effect on the debt repayments you can afford. In short, a change in circumstances includes changes in income and essential costs.
Telling Your Supervisor About Changed Circumstances
You are legally required to tell your IVA supervisor about all changes in your income or financial situation. This isn’t just good practice; it’s a condition of every IVA in the UK. When you entered the agreement, you committed to keeping your supervisor informed so they could ensure that your monthly payment remained fair and affordable.
Your supervisor will ask for updated payslips when you report an income change, as you must. The supervisor must protect all parties in the contract and ensure that your monthly payment accurately reflects your financial position. So, the supervisor may adjust your debt repayment to take account of your new position.
Failing to disclose a change in circumstances can cause serious problems. You may be in breach of your IVA, for example, and it could lead to your IVA failing. You would lose your protection from the creditors, who are entitled to enforce the debt repayment if the IVA fails.
Trust your supervisor. They are not there to punish you for earning more. If your expenses have risen in line with your income change, they will factor these changes into the repayment calculation. An income increase does not, therefore, always translate into a higher IVA payment.
How the IP Assesses Your New Income Level
Your supervisor is tasked with ensuring that your monthly debt repayment fairly reflects what you can afford. The assessment must balance your needs with those of the creditors. Your supervisor will ask for proof of your current earnings. Evidence could take the form of payslips, a letter confirming your increase or a contract. This is needed to compare your previous income with your new take-home pay and establish how this changes your financial situation.
The supervisor will update your Income and Expenditure assessment, ensuring all necessary expenses are included, such as rent, transport, childcare, insurance, and food. The goal is to understand any changes in expenses. For example, your transport costs to your new place of work may have increased. They must account for these expenses in calculating your disposable income.
Having calculated your new income after expenses, the supervisor may increase your IVA payment. They will be fair and increase the repayment by a proportionate amount. In many IVAs, extra disposable income is shared, often using a 50% split between you and the creditors.
If your increase is modest or offset by higher expenses, your IVA payment may stay exactly the same. The goal is not to take every extra penny from you; the objective is fairness.
When a Pay Rise Increases Your Monthly IVA Payments
As we’ve seen, there are circumstances under which your IVA payments will rise, reflecting your improved financial position. The payments will only increase when your budget shows clearly that you can afford more. Supervisors won’t increase payments if the numbers don’t support it, and you’ll always have room in your budget for essentials.
In some cases, a substantial income improvement may allow the IVA to finish early through a lump-sum offer or higher monthly payments.
When a Pay Rise Does Not Change Your Payments
Supervisors look at the bigger picture when assessing whether to increase your IVA payments. In many cases, they will allow you to manage your everyday finances more comfortably by leaving the IVA payments unchanged despite your pay increase.
Your payments may stay exactly as they are in the following situations:
The increase is too small to make a real difference
If your salary increase isn’t substantial, it may not create enough extra disposable income to require an increase in IVA payments.
Your budget is already tight
If you were already struggling with a very small financial buffer, an increase may stabilise your finances and give you some breathing space. Your supervisor may decide to leave things as they are, knowing that you are less likely to renege on payments under the new circumstances.
Higher living costs absorb pay rise
If rising costs absorb the full extent of your increased income, you’ll have no extra disposable income. Your supervisor will see this during the assessment and will leave your IVA payments unchanged.
You have new essential expenses
New jobs and even promotions often come with extra essential costs. Perhaps your daily commute is longer and more expensive. Your childcare expenses may rise with longer working hours or a longer commute. These extra costs will be deducted from your surplus income, reducing the need for an IVA payment increase.
The raise is temporary
Supervisors will often wait for a consistent income change before changing your IVA payment. Short-term increases like overtime, a temporary role change, or a bonus are usually treated under the IVA’s overtime or bonus rules, which normally allow you to keep a portion of the additional income.
What Happens if You Don’t Report a Pay Rise?
The IVA legally binds you to report a pay increase. Not reporting an increase can, therefore, cause serious problems for you, even if the increase is small and you feel you need the extra money. If you don’t report the increase to your supervisor, you’ll put the IVA at risk. There are several risks involved:
You’ll be in breach of your IVA
Your IVA includes a clause that requires you to report changes in circumstances. If you don’t disclose a wage increase, your supervisor can mark your IVA as non-compliant and take action to protect the interests of the creditors.
Your supervisor may enforce back payment
If your IP discovers your pay rise at your annual review or earlier, they can calculate what you should have been paying and ask you to backpay the difference. You could end up with increased payments to the end of the IVA to cover the shortfall.
Your IVA Could Be Terminated
Your supervisor can terminate your IVA for non-disclosure, especially if it is serious or intentional. If this happens, your creditors can resume UK debt collection and take any legal action to recover the amounts owed because you lose the protection afforded by the IVA.
Creditors May Demand a Full Review of Your Case
If you fail to report a pay increase, your creditors could ask for a reassessment of your income and expenses. The goal would be to evaluate whether the debt repayments you are making are reasonable and determine whether the IVA should continue.
It could delay your IVA completion
Your supervisor could withhold your completion certificate pending certain issues. If they want a variation meeting or you owe back-payments, they could delay your IVA completion and increase your debt repayment contribution.
Non-disclosure damages relationships
You need your IP to work with you to successfully finish your IVA. Non-disclosures can upset communications and make it difficult for you to talk to your supervisor if, at any stage, you need help, perhaps to request a payment reduction due to unforeseen income reductions that have caused financial difficulties.
Don’t Delay Disclosures. Trust Your Supervisor
You’ll usually be paying off your IVA for around five to six years. It’s a long time, and changes will happen. If you’re unsure how a pay rise, new job, or change in circumstances might affect your IVA, speak to My Debt Plan today. Our team can give you clear, confidential guidance and help you stay on track.
