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How IVAs might make debt crisis worse By Nikki Watkins
Fears that Britain's personal debt crisis is deepening have been reinforced by predictions that 30,000 people will go bankrupt by April. The forecast shows that the average household debt is £8,592, excluding mortgages. In addition, the Fanning the flames Most personal debt is built up through credit cards and personal loans, and fuelled by the increase in household utility bills, growing unemployment and the overhang from Christmas spending. But many experts believe that the rapidly growing bankruptcy figures are driven by consumers turning increasingly towards individual voluntary arrangements (IVAs) to pay off their creditors. An IVA is an agreement between a debtor and their creditors, whereby the debtor makes reduced payments towards the total amount in debt. The amount of money the debtor will have to pay back is only a percentage of what they owe - based on their personal disposable income - and the debt is usually considered cleared within five years. In some circumstances, up to 75% of the debt can be wiped out. As the agreement is legally binding it's supervised by a licensed professional, called an insolvency practitioner. One of the leading practitioners, Debt Free Direct, doubled its profits last year as the number of IVAs it organised rose to 538 a month. IVA companies make their profits primarily from fees charged to debtors for drawing up the IVAs, plus management fees over the course of the IVA. Mis-selling But fears of mis-selling have been raised by debt charities, banks and debt advisory services. "We have seen evidence of people being poorly advised and persuaded that an IVA is right for them in circumstances where it clearly isn't," says Peter Tutton, national debt policy adviser for Citizens Advice. He claims that in many cases personal bankruptcy would have been more appropriate. According to figures from the Debt Advisor, a debt advice group, over 40,000 people took out IVAs in 2006 - and this is set to increase through 2007. But many experts say IVAs are distorting the personal debt and insolvency picture. Richard Fiddis, managing director of information company Experian, believes that IVAs are damaging consumers' financial futures and having a significant effect on the UK's credit history. He also reckons people are often misled into thinking that an IVA won't appear on their credit report - but they are just as unlikely to get credit in the future as with a bankruptcy. Fiddis describes the rise in insolvencies as "incredible" and claims IVAs are a major cause of this. "Insolvencies rose by two thirds in the second quarter of 2006, while IVAs, which make up almost half of the total, soared by over 150%," Fiddis added. Personal debt problems As Fiddis suggests, IVAs are not a panacea for personal debt problems. One danger is that they can aggravate an individual's debt difficulties, because although they may substantially reduce the amount of your debt, you still have to completely clear the amount that you have agreed and this can take a long time. Using an example from iva.co.uk, a debt of £20,000 being paid back at £200 a month will take at least nine years to clear. This is where the issue becomes confused. James Falla, managing director of Thomas Charles, specialists in debt help, claims that after five years your complete debt will be cleared. However, this does not appear to be the case according to the calculations on iva.co.uk. These conflicting explanations highlight the need for debtors to ensure that they completely understand the agreement before they get bound into one. "The consequences of failing an IVA are fairly grim. If you have squeezed your finances to get onto the IVA but can't make ends meet after a year, then you'll have spent a very unpleasant and penniless 12 months for no benefit to anyone - except the IVA company," according to Joel Lewis, spokesperson for the Consumer Credit Counselling Service (CCCS).
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