Borrowers targeted for IVAs

Borrowers struggling with debt are being aggressively targeted by debt management companies who are paying large commissions to lenders to send on their details. Advice UK, a group of free, independent advice centres, says that commissions of up to £1,500 are being offered for the names of possibilities of an Individual Voluntary Agreement (IVA).

IVAs enable those owing £15,000 or more to work out a deal with creditors to repay a part of their debt over five years. The payback is a reduced amount, typically between 30 and 50%, but there must be an agreement by the majority of creditors first.

Debt management firms stand to make something in the order of £7,000 in fees for managing the debt over five years. Charges can be £2,500 for set up and a management fee of 10% plus VAT.

Borrowers are signing up for IVAs in record numbers, and have nearlt doubled over the past twelve months, to over 48,000. Industry experts are concerned that mis-selling is taking place. It is thought that loan firms are selling customers on to IVA companies. This is against the industry’s ethical code. In fact, in many case, people who have entered into an IVA would have been better offer being declared bankrupt. In an IVA payments, albeit reduced, still have to be made.

It is the fees involved in IVAs that make them attractive to IVA firms. There is no money to be made from bankruptcy.

According to debt advice charity the Consumer Credit Counselling Service (CCCS) only 3% of its clients are suitable for IVAs. Most are actually put on debt management plans. It started running IVAs on a not-for-profit basis in May.

The IVA firms get their set-up fees first before the creditors receive anything. As aresult of this, the banks, unhappy at the increase in personal insolvencies, are clamping down on the numbers they will accept.

IVA firms get nothing until the creditors reach agreement. This means they need more leads in the hope of getting them through the creditors’ meeting.

Members of AdviceUK provide advice on debt for free.

Those considered best for an IVA are passed to PayPlan to manage. The advice centres are paid £500 for each one. This fee covers assessing client’s needs.

What is an IVA?

An Individual Voluntary Arrangement is a formal agreement between you and your creditors which constitutes an agreement with them to pay off a percentage of your total debt, by making regular agreed payments. This arrangement will usually result in your debt being cleared after five years.

An IVA is different from a Debt Management Plan, which is not legally binding and consumers should understand the distinction.

An IVA has to be set up by a licensed professional called an Insolvency Practitioner (IP). A proposal must be prepared by a licensed IP who will present it to creditors at a creditors’ meeting.

The purpose of an IVA is to assist those in financial difficulties to reach a practical arrangement with their creditors, so that they can make a formal proposal to settle their debt by drawing up a legally binding document.

Affordable monthly payments are calculated based on your disposable income after deduction of essential outgoings.  Circumstances will vary, but generally the arrangement can write off 50-75% of the total debt.  After the final payment has been made, the total debt is legally settled, interest is frozen and your creditors cannot make any further demands. Five years is the normal length of time in which to pay off the debt. During this arrangement period your financial situation will be reviewed regularly to see if there has been any change in your circumstances.

Having decided that an IVA is the correct way to proceed, your current financial situation is assessed and a regular monthly payment amount will be agreed. Proposals will be drawn up and returned to the IP.  Then an Interim Order is made upon application to the court.  This prevents any creditors from taking legal action against you, and a creditor meeting will be set up, for you to attend.

Your creditors will be asked to attend the meeting and vote on the arrangement. Providing 75%, in terms of value, of voters, accept the proposals then the IVA is agreed and becomes legally binding on all other parties whether they voted or not.

Most IVA arrangements are based a single affordable, monthly payment, over a five year period, and are based on your earnings minus your expenses. If you maintain the repayments until the end of your IVA period, you will be free from these debts no matter how much has been paid off.

When the IVA is accepted, the IP becomes the supervisor, monitoring its progress and ensuring compliance with the agreed terms and conditions.

When the IVA is finished, the debtor will be considered free from debt, whether or not they have paid off their debts in full. Any outstanding balances are written off, resulting in the debtor being completely free to make a fresh financial start.