Adding New Debts To An IVA

When you decide to enter into an IVA, you’ll be asked to disclose all your unsecured debts so they can be included into your IVA. These include debts run up on credit and store cards, payday and personal loans, bank overdrafts and catalogue accounts. You’ll also need to list arrears from everyday living expenses such as overdue rent, Council Tax and utility bills, as well as any overpaid benefits or tax credits.

However, despite your best efforts, you might end up accidentally missing some of your debts off the list. This might be because you’ve simply forgotten about them, or because you’ve not heard from the lender for such a long time that you assume the debt has been written off.

Whatever the reason, these ‘forgotten’ debts will need to be addressed, so it’s important to tell the licensed Insolvency Practitioner (IP) who manages your IVA about them as soon as they come to light. What happens next will depend on several factors.

The size of the debt

If the new debt is worth less than 15% of the total amount of debt already included in the IVA, your IP should be able to add it into the IVA without consulting your creditors. If the debt amount is over 15%, your IP will need to get permission from your creditors before adding it in.

They’ll do this by calling a variation meeting and asking your creditors to vote whether or not to accept the new debt. Other factors may also be discussed, such as a change in your monthly payment amount or an extension of the IVA term. Just like at the original creditors’ meeting, the variation(s) will only be approved if at least 75% of your creditors vote in their favour.

Whilst some renegotiation may be required, evidence suggests that most creditors are happy to accept new debts into an existing IVA – even if this means they receive less money in the long run. The obvious reason for this is that rejecting the new debt could cause the IVA to fail and they could end up receiving nothing.

NB. Once a new debt has been accepted into an existing IVA, the ‘forgotten’ creditor is bound by its terms in the same way as your other creditors and can’t take any other action against you to recover the debt. If the new creditor isn’t happy with the IVA’s terms, they have 28 days from the date they were told about it to challenge the IVA if they wish.

The type of debt

Benefit and tax credit overpayments are two of the commonest ‘new’ debt types that people ask to introduce into an existing IVA. This is because you may not have known that you were being overpaid when the IVA was set up. Provided that the overpayment wasn’t a result of fraud, the amount will be dealt with following the process set out above.

If fraud was involved, then this will be investigated by the relevant organisation, such as HMRC. This could result in civil or criminal proceedings being taken against you, which could see fines being added to the amount you already owe. You can’t add the overpaid amount or any resulting fines to your IVA.

Whether the debt is accepted into the IVA

In some cases, your existing creditors won’t accept the new debt into the IVA and you’ll have to find a different way of dealing with it. For example, you or a debt adviser could try to negotiate a repayment plan with the ‘forgotten’ creditor that you can afford on top of your IVA payments. If this isn’t possible, your IVA will probably fail.

If your IVA fails, your options are somewhat limited. They include:

  • Bankruptcy or a Debt Relief Order (DRO) if you don’t own your home. A DRO has very strict eligibility criteria, such as having a maximum debt of £20,000, but the fees are much lower than for bankruptcy.
  • If you own a home or other expensive assets, you could consider selling these and using the proceeds to pay off your debts. If the amount isn’t enough to clear your balances in full, you or a debt adviser could try and negotiate full and final settlements with your creditors. This involves persuading them to accept a single, one-off lump sum against the debt amount and cancelling the remaining balance.
  • Borrowing money from family or friends to enable you to clear your debts or offer your creditors a full and final settlement. If you choose this option, you’re advised to approach the loan formally and put a written agreement in place stating the repayment terms and what will happen if you can’t repay the debt.

Brand new debts incurred after your IVA has started

Moving on to a slightly different topic, it sometimes occurs that a person with an IVA in place manages to obtain additional credit during the IVA’s term. If this happens and you then default on the loan, you’ll have broken the terms of your IVA and it will probably fail. Your options will then be the same as set out above.

Debts that arise after an IVA has finished

It’s rare that a ‘forgotten’ debt will resurface after an IVA has run its course. However, if this happens, the creditor is legally entitled to receive the same amount as they would have been paid through the IVA. You’ll need to contact your IP to find out how much you owe them and discuss how to make payment.