IVAs unsuitable for 98% of debtors
IVAs are increasingly being used as the debt solution of choice, but they were already massively oversold.
There are several solutions to debt problems. Informal ones might include better money management, haggling with your creditors or indeed panicking. Formal arrangements can include such things as re-mortgaging and selling your home, or insolvency via either bankruptcy (sequestration in Scotland) or an IVA - an Individual Voluntary Arrangement. (Scotland's closest equivalents to an IVA are protected trust deeds and debt arrangement schemes.)
Today I'm concerned with IVAs. Indeed, I'm concerned about IVAs most days:
Rising IVA numbers
I'm not so interested in the fact that insolvency numbers are rising. That's obvious and expected in a recession, especially as banks have been recklessly lending far too much for more than a decade. What I am interested in is how many IVAs are created relative to bankruptcies, because this gives us an indication of whether they're being mis-sold.
In 1999, 25% of people who became formally insolvent used an IVA rather than being made bankrupt. However, by 2008 the proportion has risen to 37%. The figures in Northern Ireland are even more frightening, and in Scotland too (although the latter figure might not be so terrible as there are some noticeably different rules).
If your choice comes down to either bankruptcy or an IVA, bankruptcy will be a better solution for most people, so this rise in IVA numbers is disturbing. Let me present more evidence on mis-sold IVAs:
IVAs make companies a lot of money
When you approach a debt-solutions company, they will normally make money from you. It may be they'll charge you for debt advice or they'll get commission on a secured loan. What really makes them big bucks though is selling IVAs.
In the same way that insurance sales staff call themselves 'advisers' or 'consultants', most debt advisers (or consultants) are paid to sell. They are sales people. That's why the typical car-insurance broker won't offer the cheapest or most suitable insurance policy to start with, but one which pays more commission. (I know, because I used to work in that industry.) It's the same in the debt industry.
IVAs cost you
IVAs can be very expensive. Not only do you normally get hefty commissions taken out of your payments (thus reducing the amount that goes towards reducing your debts) but you're sometimes charged a large admin fee before it's even established whether an IVA is possible. The result is that your debts go up before you've received any benefit, and you may not even get anything at all.
If you want to repay as much debt as you can, it's important to consider alternatives, whereby more of your repayments go to the creditors. Before I come to that, here's some more about IVAs. Take another deep breath:
40% of IVAs fail
TDX Group, which advises banks on limiting and dealing with defaults, estimates that of 'all IVAs activated around 40% are never completed and 15% stop paying in the first year'.
Those figures are a huge indicator that IVAs are massively over-sold, as clearly a lot of people who can't afford the repayments are being prodded into them. They are then in debt for longer than necessary, they spend more money, they get into further debt as a result of more fees, and they get more stressed and upset when it fails to work out.
If you're unlikely to last the full IVA (typically five years), that's an excellent reason not to take it out in the first place.
IVAs are sold indiscriminately
Here's another indicator that IVAs are over-sold: TDX Group reckons that 49% of IVAs are taken out by non-homeowners. This is quite staggering. Being a homeowner is one of the main reasons to take out an IVA. This is because the chance that you will lose your home are lower in an IVA than with bankruptcy. (You don't necessarily lose your home with bankruptcy either though. Just one more reason to learn more about your options.)
Finally, from the lion's mouth...
...Well, the prey's mouth, anyway. I've read huge amounts of feedback from debtors who realise after they've started an IVA that it was the wrong solution and that they were advised badly (i.e. mis-sold). Many other debtors asking for second opinions before taking an IVA have fortunately come to learn in time that the 'advice' they received was inaccurate.
IVAs can be a good idea
That's the end of my evidence about over-sold IVAs. Having said all that, IVAs are still the best solution for some people. An IVA might be suitable if, for example, you're homeowner, a businessperson, or a professional who couldn't practice your career if you're made bankrupt. However, even you lot are likely to have a better solution.
Get free impartial advice
You need advice, but you don't have to ask one of these companies that stamp their names and promises on every second Internet advertising banner.
In my opinion the two best, free resources to get personalised advice are National Debtline (England, Wales and Scotland) and The Motley Fool's Dealing with Debt discussion board. These resources get by far the best proportion of good feedback versus bad. If you have debts that bother you, no matter how big or small, these two will give you impartial advice that is normally of outstanding quality.
Good luck. And remember, if you're recommended an IVA by anyone, get a second opinion. You do have other options - and free help is available to enable you to make an informed decision.
> Read lovemoney.com's 125 tips for dealing with debt.
> Read about a new form of bankruptcy for people with low incomes in Go bankrupt for less.
> Read articles about saving money on insurance.