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.
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.