There’s been a lot of discussion on the forums recently about “mis-selling” of IVAs. This is a thorny issue, and one that perhaps needs some clarification, as the term is in danger of being misused. It seems many people on running into difficulties in their IVA claim that it has been mis-sold. But an unrealistic or underexplained IVA has not necessarily been mis-sold. 

For an IVA to be mis-sold, strictly speaking, there must be an intentional legal error in how it was set up. For example, if the debtor was encouraged to lie about their position or salary, or was told not to include a particular debt in the proposal to improve the chances of it being accepted. It is only in the case that a legal breach like this occurs, or if the IVA company directly lies to the debtor that an IVA can be labelled as mis-sold. As one forum poster put it, it is far more often a case of misunderstanding rather than mis-selling.

The problem is that the IVA is a complicated legal process, and there are plenty of clauses that people can be caught out by. It is the responsibility of a decent debt management company to explain the IVA process clearly and to lay out all the options open to a debtor, and it is also the debtor’s responsibility to make sure they know what they are signing up for.

Here are some of the key elements of an IVA that it is important to fully understand:       

•  If you own a property which has some equity in it, you will usually have to remortgage the property in the 4^th or final year of the IVA and release approximately 80% of the equity to your creditors        
• If you receive a windfall, such as a prize win or inheritance, during your IVA, you may have to pay up to 100% of it to your creditors, depending on circumstance        
• If you gain extra pay from overtime, pay rises or other sources of income, 50% of this will have to be given to your creditors        
• If your circumstances change, e.g. if you receive a pay rise or your rent decreases, then your case will be reviewed at the end of each, and you may have to increase your monthly contributions. Monthly contributions are not fixed for the duration of the IVA, and can go up or down depending on circumstance 

As always, knowledge is a debtor’s best defence.

The debt industry has always been rife with those looking to make money from debtors. Unscrupulous creditors and mortgage companies, rogue debt management companies, loan sharks and confidence tricksters are the usual suspects, offering a false path out of debt while earning a tidy profit for themselves.

Recently, two dubious organisations in particular have been discussed on the forums: the Bankruptcy Protection Fund and the IVA Council, both of whom offer to ‘rescue’ debtors from their difficulties. A lot of big promises are made, while buried in the small print are a host of hidden costs that leave the debtor far worse off then before.

The Bankruptcy Protection Fund promises to ‘annul’ bankruptcy to save a debtors house, while apparently charging the debtor with high fees and saddling them with an expensive remortgage or high interest loan. The IVA Council sends letters out, advising debtors that their IVAs have been mis-sold and telling them to stop paying and not contact their IP whilst the Council ‘investigates’. The Council is associated with a bankruptcy company – once the IVA is failed, this company presumably comes in to pick up the pieces. Anyone who is contacted by either organisation is strongly advised to talk to their IP before taking any action.

The IVA Council even began posting on the forum in an attempt to position themselves as consumer champions, but the forum regulars quickly saw through them. This Credit Today article shows some of the dubious workings behind the IVA Council, although most of this was first revealed on the forum itself.  

Debtors are often desperate and vulnerable, and it is truly lamentable when anyone attempts to exploit this to make a fast buck. It further highlights the difficulty faced by a debtor trying to take control of their situation – who do you trust? There is no obvious group of ‘bad guys’ – not all creditors are heartless and exploitative, and not all debt management companies have the debtor’s best interests at heart. The only way to avoid being caught out is to have access to trustworthy, expert advice.

Unfortunately, this blog is a case of preaching to the converted – the forum has such a wealth of expertise that any visitor to the website can quickly be advised as to the best course of action, or whether or not a company’s claims are true or false. But there are a great many people who don’t have access to this kind of advice, and they are the people who are all too likely to be cheated out of what little money they have. More needs to be done, both in terms of raising consumer awareness and in regulation of the debt industry, to protect debtors from those who prey on them.

IVAs are normally proposed when it is likely that the debtor will go bankrupt if it is not approved. Since bankruptcy will produce significantly reduced returns for the creditors, it is in their interest to approve the IVA.

But there is a potential conflict of interest in the voting process. Creditors can see a debtor’s profession, as it is a clear part of the IVA proposal.  People in certain jobs, such as teachers and police officers, cannot go bankrupt without losing their jobs. If one these people had an IVA rejected, they would probably enter into a DMP rather than go bankrupt. Since a DMP provides a much greater return than an IVA, unscrupulous creditors might vote against an IVA proposal in these cases in the knowledge that the debtor would attempt a DMP.  

This is not an attempt to spin a wild conspiracy theory, or to accuse creditors of being routinely unscrupulous. An occurrence of negative voting based on a debtor’s profession would be isolated and highly unusual. What is more interesting is that this example, however unlikely, shows how fragile the IVA agreement is, based as it is on mutual trust between debtors, creditors and IPs.

There is no legal obligation for a creditor to approve an IVA, however reasonable the proposal is. Any IP will tell you that different creditors have very different principles for voting, with Northern Rock and HBOS renowned as being especially hard to please.  If a creditor has a 26% share of an individual’s debt and decides to vote against the proposal, then the IVA will be rejected. There is only the very vague wording of the banking code to turn to – the frequently quoted phrase is that banks will “consider all cases of financial difficulty sympathetically and positively”, but this is more of a moral guide than a legal command.

The irony is that the IVA was brought in precisely to help those who were in significant debt but who could not go bankrupt, like business owners and those in sensitive professions. The explosion in personal debt has made many ordinary consumers eligible for IVAs, but they were not the people who the Insolvency Act was aimed at. It would be something of a sick joke if the people who were supposed to be helped by IVAs instead found themselves forced into unrealistic DMPs.

The seemingly impossible has happened: house prices actually fell a little in the past couple of months. It wasn’t for long – recent figures suggest that at the moment this is a blip rather than a significant downturn or housing crash. But it was the first warning sign that the housing boom isn’t going to continue forever, and this could be very bad news for homeowners who are just managing to stay on top of their debts.

It is concerning news, even without all the other economic uncertainty that’s going on at the moment. If house prices stall or fall, first time buyers might see it as a chance to get on to the housing market (and it might put a stop to dangerous practices [blog] by some mortgage brokers), but millions of homeowners, particularly those whose fixed rate mortgages are now coming to an end, may be hit with higher rates of interest and repayment.  For some people, who are only just managing to juggle mortgage repayments and living costs, this could tip them towards a serious debt problem.

This is particularly dangerous, as the strong housing market has been many people’s safety net against debt. Homeowners have been able to secure remortgages at good rates because the housing market is so strong, and used the funds raised to pay off their immediate debts. If the housing and lending markets both tighten up, remortgaging won’t be as easy or attractive an option. People will no longer have the ‘easy option’ of using a remortage at favourable rates to help deal with debts, and the UK’s huge amount of personal debt could really start to bite.

The recent weeks have seen an amazing number of debt stories in the news. Every day it seems another special report, real life story or set of statistics sheds light on the very real problem of personal debt in this country. Even politicians are at it, with both David Cameron and Ming Campbell targeting Gordon Brown on the British economy and using the debt situation as ammunition.

These attacks, no matter how politically motivated, may well have some truth to them. The economic slowdown (or, as the pessimists put it, the coming recession) is on the horizon, so we are told. Britain’s economic progress has been fuelled by consumer spending – and consumer spending, it is becoming increasingly clear, is itself dependent on easy credit and dangerous degrees of borrowing. This casual attitude to credit is driving people to record degrees of debt (£1.3 trillion at the latest estimate) and a huge increase in insolvencies.

This is deeply concerning, all the more so considering the turmoil in the IVA industry. With share prices for several companies taking a sharp decline, and creditors growing less receptive to IVA proposals, it is to be hoped that the debt management industry is going to able to provide a good service at a time when it is going to be needed most.

Banks have also been in the spotlight in an uncomfortable way, with mis-sold Payment Protection Insurance, credit cards with minimum repayments that barely cover the cost of the interest and the collapse of Northern Rock (well known on the forums as a particularly difficult creditor) have all heightened a general distrust of banks as unscrupulous creditors.

The stories have been many and varied, but what is needed most is the increased awareness that this media coverage has brought. People need to be aware of the consequences and dangers of debt to avoid falling into the credit trap in the first place, the tactics used by unscrupulous creditors to push credit on to people, and the options that are open to people for resolution of debt problems. Far too many people are unaware of the hard facts concerning bankruptcies, IVAs and debt management plans, and better knowledge of the debt situation in this country will hopefully help its resolution.

Personal loan rates for many creditors have gone up today, some by up to 4%. Given the concerns over the much publicised credit crunch and the problems of large scale lending for banks, hedge funds and private equity firms, it was inevitable that this was going to come back to hit ordinary consumers sooner or later. The rise also looks set to affect mortgage loans, with hard pressed homeowners again hit by yet another instability in the mortgage market. 

You can read the full facts of the story on the forums, http://www.iva.co.uk/forum/topic.asp?TOPIC_ID=6174, which provides some details on which lenders are putting up their rates, and how much they are increasing.

Fortunately, the loan rises are apparently only affecting new customers, so those already in loans will not be stung by the rise. This may not be an entirely negative thing. In the long term, it is possible that this will help to reverse our move to a ‘credit culture’, and that since loans are becoming less competitive people will be more wary about using them.

But this is over optimistic – it is probable that the banks are seeking to gain tighter control over their finances and to make up lost profits by squeezing harder on personal loans. Those people with a mid-level of debt, who could go either way, may find themselves pushed into financial difficulty by mortgage and personal loan rate increases.

A limited, controlled amount of credit necessary and useful for most consumers. Loans, with their lower rates of interest, are certainly better in this regard than credit cards, and a significant interest rise on this resource is concerning. People may be tempted into special offers on new credit cards due to higher loan rates, then find themselves caught by sharp rises on the card further down the line. 

It is to be hoped that this truly is a necessary rise to stabilize the economy and credit industry. But customers may feel that banks are trying to make up for lost profits at their expense – if they had exercised more restraint in the provision of credit and their own reckless borrowing in the first place, these problems could have been averted. �

To say that being in debt is a stressful experience is a gross understatement. Most people who have had money troubles will recall that sickening moment when they realised they had more going out on minimum payments than they had coming in from their wages. Living in debt is a constant struggle to make ends meet and ward off increasingly threatening creditors, and every unexpected expense is cause for a panic attack and desperate financial reshuffling.

Increasingly aggressive letters from creditors are only the beginning, and are soon followed by repeated phone calls and threats of doorstop visits. Unfortunately, there have been numerous reports of this harassment continuing whilst debtors are in the midst of IVA proposals.

While an IVA proposal is being put together by an IP and considered by creditors, all charges and interest on debts are frozen, pending the outcome of the creditors meeting. This should mean that the phone calls stop until the case has been decided, but this is all too rare.

Whether it is trying to tempt people with more credit, claiming that one of their creditors isn’t included in the IVA proposal or just demanding immediate repayment, phone harassment of debtors is a persistent and frequently reported problem on the forums, and one that needs attention. People in debt are in a vulnerable position, and it seems particularly unjust that they should still be targeted when they have been proactive in trying to set up an IVA and take control of their debt problem.

This harassment has a very real effect - tales told by forum users of hiding with the curtains drawn whenever the doorbell goes and unplugging or ignoring the phone are depressingly common. Many in the IVA.co.uk community have reported serious illnesses caused by stress during their debt troubles, and hassle from creditors is one of the primary causes of this. 

Of course, creditors are used to dealing with evasive debtors, and may feel that these increasingly harsh methods are the only way that the debts will be repaid. But they have no right to continue this during IVA proposals. It is to be hoped this is simply a matter of poor internal communication rather than actual policy - most creditors employ call centre staff working on commission to make these phone calls, and it is probable that it simply takes time for information to filter through to them. An email that remains unsent or forgotten can mean the difference between five phone calls a day and being left in peace.

Any debtor in the midst of an IVA proposal who is being called by creditors should inform their IP immediately. The message may take a while to filter through (since it has to go first through the IPs office and then through the creditors), and repeated efforts may have to be made if communication stalls at any point, but it is currently the only action available to beleaguered debtors.      �

Several IVA companies, most prominently the DebtMatters Group, have suffered significant losses to their shares in recent days. Amongst other causes, they have blaming a hardening of creditors’ attitudes towards IVAs (such as the already infamous TIX debate) for their reduced profits.

The IVA sector has expanded hugely in the past few years, and may be suffering from its own success. Creditors are now demanding higher rates of repayment and greater control over IPs’ fees.

The issue of IPs’ fees is always going to be a difficult one. They provide a valuable and necessary service, as the setting up of an IVA is a complicated arrangement and one for which IPs must be paid. There are accusations that some unscrupulous IVA companies are pushing forward unsuitable IVA proposals in order to profit from the fees, irrespective of whether or not an IVA is the right solution for the individual debtor, and companies who are guilty of this practice are deserving of serious censure.   

But this kind of behaviour may become common practice if these trends continue. If IPs become underfunded, the quality of service will drop. Many debtors already report difficulties getting in contact with IPs and a lack of personal service in some companies, and if IPs are forced to cut fees excessively in response to demands from creditors, the industry as a whole will become less reliable.

Naturally, this is not a call for IPs to charge whatever they like – overcharging for IVAs is as unacceptable as misselling them. But they must be able to provide a decent service. Underfunded IVA companies providing poorer services will hurt debtors first and foremost.    

It is to be hoped that in this conflict between IPs and creditors, with both sides throwing around accusations of corporate greed and exploitation of consumers, that struggling debtors are not forgotten, and are still given fair and reasonable access to appropriate debt solutions.

Today’s news makes for unwelcome reading. New research has shown a dramatic increase in the number of retired people who have been forced to declare bankruptcy or enter into an IVA, going up from 900 (3% of all recorded insolvencies in 2002) to 7,900 (7% of insolvencies in 2007). The research was commissioned by an accountancy firm, Wilkins Kennedy

There are numerous theories proposed for this increase. The rising cost of living, longer life expectancies, easy acquisition of credit and the complexity of the tax credit system have all been blamed, with commentators suggesting that pensioners are paying more tax than they need to, unable to work through governmental red tape on tax credits.

Older debtors can be caught by the drop in income once they retire – what was a manageable level of debt and minimum repayments on a salary can quickly become problematic on the reduced income of a pension, and it can be all too easy to rely on credit cards or loans to make ends meet. Once this cycle has begun, a pensioner becomes trapped in it just like anyone else – credit is used to pay credit, and the payments spiral out of control. It has been suggested that older debtors have a greater sense of shame at being in debt, and thus do not seek help until it may be too late, though many on the IVA forums would say this is a problem that is common to all debtors, irrespective of their age.

Whatever the causes are, it is a concerning development. Pensioners’ do not have the option of overtime or the potential for promotion to work their way out of difficulties, and as such are more vulnerable to rises in costs and unexpected expenditure.  While these insolvencies still remain a relatively small proportion of the total figures, this could see the beginning of much larger problem, and reports of bankrupt pensioners could become depressingly commonplace – people should be able to enjoy a sense of security during their retired years, not be faced with the stress and upset caused by a serious debt problem.

Most popular perceptions of those in heavy debt focus around overspenders living beyond their means, or those with low incomes who get stuck in a cycle of debt by the ready availability of credit. But with this rise in the number of pensioners’ insolvencies, there needs to be an increased awareness of this issue, and a review of how this situation can be prevented. Debtors made in trouble through money mismanagement is a growing problem in our society, but an epidemic of pensioners’ in IVAs and bankruptcies could be a real tragedy.     �