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Case Study – IVA

Susan and Neil’s Story

  • Susan and Neil were both in their 40s and were both on their second marriage. They met a few years ago, married in 2007 and bought a large house together in Cornwall. Neil had three children from his first marriage and wanted to settle near to their home and Susan had no children from her first marriage. The house they purchased had to be larger than they needed themselves as it had to accommodate Neil’s children when he had access. The house was purchased on a joint mortgage based on both their salaries at the time.

    Neil worked in a Senior Management role for a large Engineering firm and Susan was a secondary school teacher currently working as a Head of Department. Their home was based in a rural location and, as they both worked in different places and for different hours, they owned and used two cars on a regular basis. Late in 2007 they had an unexpected surprise when they discovered that they were expecting their first baby together! Although a big shock, their baby son is much loved. Susan took a period of maternity leave and then returned to work full-time as they needed her salary to help pay for the mortgage. Their son went to a local child-minder whilst she was at work.

The Finances

  • Susan and Neil had to dig deep to buy the house they fell in love with and the mortgage was quite hefty. It needed both their salaries to pay for it. Neil had to pay child support to his first wife of around £400 a month and they took out a personal loan to buy Susan’s car which they were still then paying off. Neil had a company car provided to him by his employer.

    In addition to this the couple had run up significant credit card debts over the last year or so. They had, for example, paid for their honeymoon on credit card and had had to furnish their home. Prior to having their baby they were, however, coping just about OK. Some months they did have to juggle their finances and buy certain items on credit cards as they ran out of cash and they weren’t always able to pay these off in full every month. Generally, however, they were able to meet their aim of living within their means and were slowly but surely reducing their credit card debts. The couple reckoned at this stage that they owed around £50,000 in loan and credit card debts.

The Problem

  • The unexpected arrival of their baby son basically tipped the couple over the edge from being in a situation where they were able to cope financially and not being able to cope at all. Susan was unable to give up work because her salary was essential to their basic mortgage and household expenses. But, the money she earned was effectively reduced at the same time because she had to pay childminder fees for the care of the baby whilst she was at work.

    So, the couple were left with an added expense (babies do cost a lot!) and with less money to manage on every month. Their initial mortgage deal then ran out and, although they took on board another deal, this was not as good as the one they had had originally which added to their essential outgoings every month.

    It quickly became apparent that they would not be able to cope as they had been doing and that something had to give. Soon, they noticed that they were having to use their credit cards every month just to pay for basic stuff but they did not have the income to pay off what they were borrowing here in the following month. The month that they had to use a cash advance on a credit card to repay other debt commitments was the last straw for the couple and they decided that they needed to do something to sort themselves out.

The Solution

  • Initially Neil and Susan looked at bankruptcy as an option. Neither of them wanted to take this route as they knew that it would mean that they would most likely lose their home and that they (and their extended family) would all suffer. Neil was also very focused on taking responsibility for paying off what they had borrowed and felt that a bankruptcy route was a bit of a ‘cop-out’. He felt that their creditors would not see much being paid back over the course of the bankruptcy.

    After taking a look at what a bankruptcy would involve on some online financial advisory sites Neil noticed that an IVA (Individual Voluntary Arrangement) might give them a similar solution to a bankruptcy but might possibly suit them better. He contacted an Internet based IVA specialist for advice.

    The specialist here confirmed that Neil and Susan could take out a joint IVA to sort out their finances. This would last for around 5 years and would involve them committing to regular payments to pay off their debts. But, at the end of the five years they would be free and clear. Any remaining debts would be written off whether they had managed to repay them in full or not.

    This solution suited the couple much better. They were keen to take a route that would help them manage their money comfortably and keep them out of further debt trouble but they wanted to commit to at least trying to pay off what they owed. Their IVA advisor worked them through a budget to establish how much money they could actually afford to put towards their repayments every month. Once both sides were happy with the results their advisor (a qualified Insolvency Practitioner) started the IVA process for them.

    Neil and Susan had a tense few weeks while their advisor put together their agreement and started negotiating with their creditors. Some creditors refused to accept the IVA but, luckily, their advisor convinced a majority to go for it and it was approved. Now the couple simply pass their budgeted repayment to him every month and it is paid to their creditors for them to reduce their debts. Their interest has been frozen so their debts are also not getting any worse.

    At this stage it was anticipated that the couple will pay £500 a month into their IVA for the length of time that it lasts. This will see them pay off at least £30,000 of what they owe. The remaining £20,000 or so will then be written off for them. If their financial circumstances change then they are more than willing to increase their payments as they go along which could help them repay even more of their debt commitments.

Neil and Susan Today

  • Neil and Susan actually feel much more financially comfortable than they have for a long time. They know what they must commit to repay every month but they also know that this is a sum that they can afford and that will not leave them in financial hardship.

    They feel really pleased with the advice that their specialist gave them. Both of them would rather not have taken a bankruptcy route as they feel that there is a stigma involved and Neil, in particular, would have been uncomfortable being allowed to walk away from his debts so quickly without even attempting to pay them off.

    Although they have had to curb their spending at the moment they know that this won’t last forever. To be honest they are both quite pleased to have to stick to their budget and to live within their means. As Susan says: ‘We both got carried away with what we could buy on credit. Both of us have well paid jobs and knew that we could technically afford what we were buying – but we just got used to buying it before we could afford it. Before we knew it we got into a situation where we actually couldn’t afford what we should have been able to buy any more because of our reliance on loans and credit cards. The baby wasn’t just a pleasant surprise, he gave us a real financial wake-up call! By the time he’s old enough to need pocket money of his own we’ll be back on track again and we can concentrate on teaching him to save before he spends and not the other way round!’
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