Beware the cost of smart plans to beat the bailiffs
THE CREDIT CRUNCH is putting ever more pressure on the nation’s finances, pushing thousands to the brink of bankruptcy.
If you are staring insolvency in the face, there may be a less painful alternative, called an individual voluntary arrangement (IVA).
But approach IVAs with caution. Some greedy debt-management companies have tried to persuade people to take out IVAs when they may have better options. Their fees can also be expensive, so check this really is your best way out of debt.
What is an IVA?
IVAs were introduced in 1986 to offer people in debt a less brutal alternative to bankruptcy and to give creditors such as banks and credit card companies the chance to retrieve at least some of the money owed to them.
If you can't stick to the terms, you are at the mercy of creditors.
An IVA is a formal agreement to pay a reduced percentage of your debt over a set period, usually five years. You will typically pay a lump sum up-front, then a series of regular payments.
How much you pay depends on your income and expenditure. If you maintain the payment schedule for the full term, your debts are considered settled.
Who can take them out?
To take out an IVA, you need sufficient regular income and assets to repay a chunk of your debt. You must also owe more than £15,000 to at least three different creditors and be able to pay £200 a month towards clearing your debts. You can’t set an IVA up yourself, you have to use a qualified insolvency practitioner.
Must all creditors agree to the IVA?
Your creditors would prefer to get 100 per cent of the money owing to them, rather than a percentage, but something is better than nothing. You make an offer to your creditors, and they will vote whether to accept it. There is often a bit of haggling involved. If creditors holding 75 per cent of the debt vote for the IVA, it will be approved.
How much do they cost?
IVAs are not free — and they are not cheap either. Insolvency practitioners can charge up to £1,500, and some charge even more, says Andrew Smith, marketing manager at insolvency practitioner ClearDebt Group.
“Usually this is deducted from the first few contributions. If you don’t complete the IVA, you will not get these fees back.”
Watch out for companies charging fees up-front. This could be wasted money if your IVA isn’t approved. Last year, banks started rejecting IVA applications because they felt debt-management firms were pushing through unsuitable cases.
In January, a new IVA protocol was agreed, and an increase in applications is expected.
Are there any alternatives?
If you have smaller debts, you may be better off with a debt management plan which commits you to a timetable of monthly repayments.
The drawback is that it is not legally binding, and your creditors can demand payment at any time, says Joanne Wright, partner at personal insolvency specialist Begbies Traynor.
“The benefit of a debt management plan is that it is usually cheaper but you must be able to repay all the debt — you aren’t writing any of it off. These plans often fail because the debtors can’t afford to repay all the money they owe.”
What are the benefits of IVAs?
You don’t have to repay all your debts — only a percentage. An IVA is legally binding, which means your creditors can’t change their minds later or take further action against you, provided you meet your agreed monthly payments.
You can also continue to operate a normal bank account, although without an overdraft facility.
Bankruptcies are advertised in the local papers, but IVAs are not.
Perhaps most important of all, an IVA may allow you to hang on to your home, with the agreement of creditors. Bankruptcy won’t.
You also avoid the restrictions of bankruptcy. People who have been made bankrupt can’t hold public office, and professionals such as lawyers and financial advisers could lose their status.
And the drawbacks?
Don’t think of an IVA as the easy way out. Although you may be able to hang on to your home, the rules say you will have to remortgage after four years to release any extra equity from your property. This will increase the size of your mortgage.
You can only take out an IVA if you can afford to offer at least some payment to your creditors. If you fail to stick to the terms of the arrangement, your creditors are free to take action against you. If you fail to comply with the terms of the IVA, you will be at the mercy of your creditors, who may force you to declare bankruptcy.
Does an IVA bar you from financial services?
All IVAs are recorded on the individual insolvency register which anyone can search free of charge. If you approach an institution for credit, it will know if you have an IVA.
Credit reference agencies will hold details of your IVA for six years, says James Jones, consumer education manager at credit reference agency Experian. “This can damage your creditworthiness. IVAs may be seen as an alternative to bankruptcy, but they can do as much damage to your ability to get a mortgage as bankruptcy.”
Where can I get advice?
Your local Citizens Advice Bureau can give you free, impartial advice on your alternatives. Last year, it advised 1.7million people with debt problems. It deals with about 6,600 cases every day.
Payplan (0800 917 7823 or www.payplan.com) and National Debtline (0808 808 4000 or www.national debtline.co.uk) can also give you impartial advice.
For further information, visit The Insolvency Service website on www.insolvency.gov.uk.
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