I received the following letter this week from a client who completed his IVA and I wanted to share his kind words with you all.

No two IVAs are the same and as a Personal Insolvency Advisor it’s part of my job to deal with the changing financial circumstances which can occur in a person’s life throughout the duration of their IVA.

Dear David,

I am writing to thank you and all concerned with me over the last few years, before I rang your company I was about as low as I could get. On talking with you and the others I came to find that there were people who not only cared, but could help. The service and advice you gave me and the help went beyond what I thought possible, you got me through the last few years.

If I had to give points out of 10 it would be 12.

In the case of this client, he suffered an accident at work which resulted in him losing his job. In light of these changes, we first advised him to find out what benefits he was entitled to receive. We then reviewed his income and expenditure and at this stage, it was clear he could no longer afford to make his IVA payments.
As there was little prospect of his financial situation improving, we submitted a proposal to his creditors asking them to consider the contributions paid to date as a full and final settlement of his IVA. This proposal was agreed by creditors and his IVA was completed early.

You can read more testimonials from our IVA clients here: What people say about ClearDebt and if you would like to leave a review of the service you have received, you can find links to review us online here: Review ClearDebt.

Is a “free” debt management plan always better than paid debt help from a fee-charging company?

I’d like to start by saying ClearDebt Group is a fee charging debt resolution company, proud of what we do and how we help people. Our brand ClearDebt does IVAs and Abacus provides fee-charging debt management plans.

I’ve written before about the assumption many make that free debt advice is always good advice (something I don’t agree with). You’ll find links to those blogs at the bottom of this one.

But, in this blog, I want to concentrate on the question of whether a debt management plan from a fee-free advisor, is automatically better value than a debt management plan or an Individual Voluntary Arrangement (IVA) from a fee-charging debt resolution company like ClearDebt.

I touched on this in another recent blog (IVAs – A Question of Perspective) which looks at some of the key differences between IVAs and DMPs – and critiques leading creditor-funded provider, CCCS’, perspective on this.

Today’s blog has been prompted by two recent blogs from Payplan (a creditor-funded company), the first dealing with a client’s experience of a debt management plan and the second comparing IVAs and DMPs.

In both cases I have commented on the articles and, in both cases, my comments have (at the time of writing, either failed to be published or have been censored. So, I decided to put my thoughts here instead.

A Payplan Client’s Experience

Dawn’s Story:It’s a really good news story about a client (Dawn) who has managed to repay most of her £28,000 debt in four years (and will probably succeed in paying off the lot in 52 months, or thereabouts). But, it raise issues with me because the client said “I have 4 payments left (depending on interest/charges etc) and it feels so good.”

Great – but the fact that she seemed not to be sure about interest and charges niggled me.

The issue of transparency when it comes to freezing interest charges

Yes, some creditors freeze interest and some don’t, but a fee-charging debt resolution company is obliged to ensure the client knows what’s what. The fact that this Payplan client didn’t seem to know brought to mind this article from the Guardian published a couple of weeks ago – from which it appears that Payplan was paying a client’s creditors late (debt management companies are supposed, usually, to pay creditors within five working days of getting funds from the client) and, possibly, causing additional charges – Payplan seems to have thought the client owed £143, in fact, there was £4,086 left to pay.

Cases where an IVA is more suitable than a Debt Management Plan

In Dawn’s case, the description of her case led me to think that an IVA (where interest and charges would be frozen for certain, and the possibility of debt forgiveness existed) might have been a better choice for Dawn – so I commented: “It’s great that Dawn has got this far. I wonder, how long has this taken? Also I note that she says “I have 4 payments left (depending on interest/charges etc) and it feels so good”: so presumably her interest and charges were not frozen as they would be in an IVA. Why wasn’t a five year IVA possible in this case?”

PayPlan published this and responded. So did Dawn (thank you – it takes a lot to talk publicly about your debt situation). But i wanted to know more and I left the following: “Dawn, I think that’s brilliant: So you must have been paying what, about £540/month (assuming 52 months and most interest and charges frozen?”

Payplan published: “Dawn, I think that’s brilliant.”

I am not implying Payplan did the wrong thing with this client. There’s no such thing, really as a typical debtor: every case different. And I also understand Dawn might want to protect her privacy. But that should have been said. I really think this case is worth exploring to help others understand when a DMP is the right choice over an IVA (If an IVA is possible, a DMP will rarely be the most appropriate advice).

The same issues are explored in this thread from IVA.co.uk (CCCS – Indifference), which seems to indicate that this creditor funded organisation takes relatively little interest in whether it’s clients are still paying interest.

IVA vs DMP

Which brings me to Payplan’s second blog, a simple DMP vs IVA comparison. It’s pretty good. But it lacked one important point. So I commented:

“How about adding: “all interest and charges are frozen when your IVA passes creditor’s meeting”, as this often means a debtor pays thousands less than they would in a debt management plan.”

This is still, as I write, awaiting moderation. It’s fact. It makes a huge difference to many debtors. I don’t even want credit for it, I’d just like to see it in the list. It’s something people should know. Payplan does make the point that “Any debt remaining after your IVA is completed is written off.”, but it doesn’t attempt to quantify this. Probably wise; all cases are different – but it seems rather underplayed as an advantage because – again, This can make a huge difference to the debtor. IVA and DMP contributions are usually similar (though DMP contributions are often larger because creditors won’t accept that people in DMPs have financial emergencies whilst they are in their plan) But the typical IVA lasts half the time (five years) of the typical DMP.

Payplan should add one other point to their list of IVA bullets (I’d comment – but what’s the point?): Houses aren’t under threat in an IVA (but could be if you failed to complete the IVA and went bankrupt), but debtors with equity will be asked to make a contribution from that toward the end of their IVA – this is sometimes a pragmatic reason for choosing a DMP instead.

We welcome all comments on this blog and will publish all, unedited, unless they are scurrilous, libellous, pornographic or scatological.

Fee vs Free debt Advice – older blogs:

You get what you pay for

Value and Standards

I’ve been concerned for a while that there seems to be a tendency by some of those who write and blog on personal debt to understate the value, to someone in debt, of an Individual Voluntary Arrangement, rather than a Debt Management Plan – just because IVAs tend to be provided by fee-charging organisations.

Yes, an IVA is only available to people who are insolvent. But many who could take advantage of an IVA get put into a Debt Management Plan instead, usually, at least doubling the time it will take to repay their debt and without any of the certainty that comes with an IVA.

What CCCS say about IVAs

Let’s look at what, for example, CCCS said in a recent blog (their comments quoted below) and what we believe to be the case:

IVAs are only an answer to your prayers if your financial situation dictates that you need an IVA.

If this said “if you are eligible for an IVA” then this statement would be more accurate.
IVAs freeze all interest and charges from the day your creditors’ meeting is passed, and, if you make all the payments (usually 60) then a substantial proportion of your debt (usually half or more – often more – but it entirely depends on your ability to repay, which, of course, makes an IVA fair to creditors too) is written off. Creditor harassment stops too from the day the IVA is approved (in practice it might take a few weeks for the letters/phone calls to stop).

Debt Management Plans usually require higher contributions than IVAs because the expenditure guidelines (most are required by creditors to use those which CCCS provide, interestingly enough) in debt management plans don’t allow for contingencies, whilst IVAs do. So, someone in an IVA is allowed to get a couple of tyres, to pass their MoT, so they can drive to work. Someone in a DMP either stops payments for a month or two, putting any interest freeze negotiated with creditors in jeopardy, or they get the bus.

Re-mortgaging your house in an IVA

Yes, you do write off a certain amount of debt with an IVA but you could be forced to re-mortgage your house

All the indications are that the debt write off in an IVA is very significant – typically cutting debt in half in ClearDebt’s case – and don’t forget that frozen interest (that could potentially increase the savings made in an IVA by thousands). In addition to this, nobody is ‘forced’ to sell their house – they are made aware of what the creditors will require in order for the IVA to be successful before any documents are signed, and, with reputable IVA providers, before any fee is paid to the provider. If you don’t like what the creditors are asking for, you don’t pay a penny in fees and, instead of the IVA you find a more appropriate solution, which may or may not be a debt management plan.

Should you proceed with an IVA you will, if you have equity, be asked to re-mortgage the house in the last year of an IVA and to provide your creditors with a substantial portion of this (85% of your equitable share – so 85% of half if it is just you in the IVA and you share the house with a partner). If you can’t get a re-mortgage for the calculated equity then you will be asked to make an additional year’s contributions. If your share of the equity is £5,000 or less you won’t need to re-mortgage or make any additional contributions. What’s more, if you do release equity, your IVA contribution is reduced by the amount of the additional re-mortgage payment – so your outgoings don’t change. And, in an IVA, you’ll still be very unlikely to end up paying anywhere near as much as you would in a Debt Management Plan.

What happens to your car in an IVA

you can lose your car…

Rubbish. Yes, if you’ve three Ferraris parked on the drive they will be seen as assets and will have to go. But, even then, you’ll be asked to downsize – not lose your motor entirely: If your cars are just the normal family motors they’ll stay. If both of you need a car for work, for example, you’ll stay a two car family and your disposable income will be worked out to ensure you can afford their use. This is just scaremongering.

IVA Fees

the fees can be high…

The fees, as CCCS know, are entirely predictable; The agreement between government, creditors and insolvency practitioners has created a protocol with standard fees. What’s more, if a debtor completes an IVA all they pay is the monthly contribution that has been agreed they can afford – in effect, if you go the distance, it is the creditors that pay – not you. If you have a high disposable income, the IVA supervisors’ fees can reach a maximum of 15% of the monies distributed to your creditors. Never higher. Incidentally, many IVAs now get arranged for monthly contributions of around £100 – so they are no longer the prerogative of the more highly paid debtor.

How intrusive in the IVA process?

…and the process can be incredibly intrusive. A debt management plan never goes into that level of detail.

This is an extraordinary comment. The writer must be aware that the process of creating a statement of affairs for an IVA is almost identical to that for evaluating contributions in a Debt Management Plan. Both solutions have to be intrusive to ensure that appropriate advice is given. An IVA has a protocol requirement for an annual assessment, and contributions can go up and down depending on your situation at that time. But most reputable debt management firms do this too – and, I suppose the author might justify his comment by the fact you don’t have a duty to disclose changes in circumstances in DMPs – but you should – and if a pay rise meant you could pay off your debt faster, why wouldn’t you?

Can you trust your IVA company?

Too often, the insidious creep of “IVA=write off debt” (parroted by dodgy debt companies) means that it’s seen as an easy way out. It isn’t.

IVAs can only be provided by licensed insolvency practitioners who are subject to a toughly monitored, strict statutory code. IVAs are well regulated and problems with providers are rare. So, by the time an IVA proposal is being drafted, the debtor is in the safest of hands. There are some lead introducers who promise IVAs but merely sell on debtors’ details – I believe the new guidance from the OFT will put an end to them.

Is an IVA an easy way out? No. It’s five years hard labour at the end of which people have, through the school of hard knocks, learnt to manage their money and to have a strong aversion to credit. But, unlike a DMP, there is light at the end of the tunnel from day one – all interest and charges frozen, and debt freedom in five years, usually – unlike the minimum ten that a DMP will normally take.

ClearDebt is not one of those companies that slam payday loans – at the bottom of this blog you’ll find links to a couple of things we’ve written about them in the past.

However, taking out a payday loan whilst you are in an IVA could put your Individual Voluntary Arrangement at risk.

When they do the client’s annual review, our IVA supervisors are noticing a number of clients who have taken out a payday loan – often to deal with an unexpected financial crisis but sometimes, they say, “to help with Christmas” or even “I just ran out of money”.

In many cases, it was quite unnecessary for the client to take out this loan (we could have helped) and in some; it’s actually put their IVA at risk.

IVA hardship

Now, if any client can prove hardship we will always try to help by offering a payment break and, if necessary, a variation for reduced payments either temporarily or permanently – this will usually involve us conducting a full income and expenditure review. If a client’s situation changes dramatically and the IVA is no longer viable we will always discuss alternative options (including bankruptcy) – if your situation is getting worse and there is no light at the end of the tunnel – please talk to us and don’t make your situation worse by taking out more debt. We will help wherever we can.

We encourage people in an IVA not to take out any new credit at all, but, people are permitted to obtain a total of no more than £500 without their IVA supervisor’s permission. So, a very small loan, paid back quickly, won’t break your IVA. However, as I’ve pointed out above, it might be better to contact us and see what we can do to ease your situation – it’s in everyone’s interests that you are able to complete your IVA and adding extra interest payments, even for just a month or so, isn’t going to help.

IVA default

The real problem arises where an IVA client has obtained credit of more than £500. Not only, of course, are bigger amounts more difficult to repay, but your IVA provider has no alternative but to tell you that you are in breach of your IVA and that you have 28 days to repay the outstanding loan or make proposals to do so. Most people in IVAs won’t have the funds to do this. Where the debtor can’t repay – or even where proposals are put forward – we have to call a default meeting with creditors. We find they try to be helpful – but still, often the result is the end of the IVA.

Please – if you are struggling for any reason at all, make your IVA supervisor the first person you call – not the last.

Here are links to some of our previous blogs on payday loans:
- Debt Industry Opinion – Payday loans and debt
- Should interest rates be capped?

We’ve become aware that a number of people in Individual Voluntary Arrangements are hoping to benefit from the recent decision by the banks to stop fighting PPI miss-selling claims and pay up . Sadly, it will rarely mean more money in the pocket: People in IVAs who are eligible to reclaim Payment Protection Insurance (PPI) premiums and/or compensation from banks and credit card companies will usually see it go to reduce their debt and will not get the cash themselves.

This is because the purpose of an IVA is to repay as much money to your creditors as possible whilst maintaining a good standard of living and as such any money received needs to be paid to your Supervisor to ensure your creditors receive the best possible return on the money you borrowed.

In the past, certain creditors have been looking to offset PPI funds against their own claim within the IVA, however it has recently become apparent that PPI Claims are compensatory in nature as the PPI Policy should not be linked with the debt. This means that creditors are no longer able to do this and must treat the claim as an after acquired asset and pay the money to the Supervisor of the IVA estate.

As PPI is an after acquired asset, the Supervisor of your IVA must now ensure that ALL potential PPI claims are thoroughly investigated and ensure that the funds from any successful claims are paid to your creditors.

IVA Windfalls

Unexpected sums like these are called “windfalls” and all have to be paid into the IVA for the benefit of your creditors. The same is the case if you inherit a sum of money or are fortunate enough to win the lottery.  Put simply, if your creditors have agreed to write off a considerable amount of your debt, it is only fair and reasonable to give them as much as you can.

Here’s the clause that usually appears in our IVA agreements – most IVAs, whoever they are written by, will have something similar:

“Where any creditor agrees, for whatever reason, to  make a repayment to the debtor during the continuance of the arrangement, then that payment shall be used solely in reduction of that creditor’s claim in the first instance. If such repayment results in the creditor’s claim being entirely extinguished (after the application of set off) any surplus will be treated as an after acquired asset and offered to the supervisor for the benefit of the arrangement.”

IVA holders who are unclear about their own situation should contact their IVA supervisor.