IVA way puts 4,000 back in control of their lives
Sunday 13 November 2005
It's impossible to ignore the dark debt clouds gathering over UK consumers.
Thanks in part to the explosion in cheap credit, low interest rates and continuing failure of banks to share financial data, greater numbers of Britons have been getting hopelessly into debt.
Eighteen months ago, new rules were introduced allowing bankrupts to be discharged within just one year (rather than three, as before). Since then, more people than ever before have declared themselves bankrupt.
Around 80 per cent of personal bankruptcy cases now come from individuals who put themselves into bankruptcy, instead of being forced to do so by their creditors. According to figures from the Department of Trade and Industry, the three-month period from July to September this year was the worst quarter for personal insolvency on record, with 11,195 bankruptcies. Figures are up by 31 per cent on the same period last year.
Older consumers who have traditionally shunned debts will find this statistic shocking. But for many young graduates conditioned to expect a £12,000 debt on leaving university, bankruptcy represents a path to financial freedom.
"In April 2004, [part] of the Enterprise Act 2002 came into force, making it possible for a bankrupt to be discharged within a year," explains Danny Davis, head of the insolvency group at the law firm Mishcon de Reya. "This [has] led to a lot of people, particularly young people in their late 20s and early 30s, choosing to clear massive debts - credit cards and loans mostly - by declaring themselves bankrupt."
If you're not a homeowner and have no significant personal assets, then bankruptcy now makes it relatively easy to walk away from your debts.
Steve Treharne, head of personal insolvency at accountants KPMG says: "There are probably some young and irresponsible people who view bankruptcy as an easy option, but for the majority of people it is the solution to a problem that has become unbearable and needs to be addressed urgently."
The risks of bankruptcy have been well highlighted. Once declared bankrupt, you have to hand over all your assets, including bank account books, insurance policies and bank statements, and stop using any credit cards or bank accounts immediately.
You will not be able to obtain credit of £500 or more without warning the lender that you are a bankrupt - when higher rates of interest will usually be charged.
If you are a homeowner with equity in the property you could be forced to sell your home to release money to your creditors.
Your status as a bankrupt will also bar you from working in the financial services industry.
The good news is that your bankruptcy will end within 12 months and you will be discharged from all your debts. Currently the average bankrupt is discharged after eight months, but their problems won't end there.
Just as with consumer credit, getting a mortgage tends to be very difficult in these circumstances, with higher loan rates applied. Your credit reference will be marked for six years.
If bankruptcies are rising at a worrying rate, the number of people signing up for the main alternative to bankruptcy - the individual voluntary arrangement (IVA) - is soaring.
In the same July to September period, 4,199 IVAs were registered - nearly double the number in the same quarter last year.
IVAs carry less stigma than is attached to bankruptcy, but they still damage what remains of your credit status. Applicants make a formal arrangement (via a court with help from an insolvency practitioner, usually somebody who works for an accountant) with their creditors to pay a set proportion of their income each month.
Debts will be frozen so that no more interest or default fees can be added to the total. The agreed monthly sum is paid into a trust and supervised by the insolvency practitioner, whose fees are deducted from the amount paid to creditors. Insolvency practitioners generally charge £75 a month, and their charges should represent no more than 40 per cent of the total paid into the trust.
IVAs normally run for three to five years. After that, the debts are written off - even if they have not repaid them in full. But like bankruptcy, the arrangement will mark your credit reference for six years.
IVAs are often considered a better option than an alternative known as an "informal arrangement", where you arrange to repay a "compromise" sum to creditors. This is not legally binding and your creditors could change their mind and ask you to pay everything back at a later date.
For Mr Treharne, the surge in the number of IVAs is not a worrying trend, but rather a sign of a more responsible attitude developing among debtors.
"People are starting to take stock of their situation and seek help in repaying their debts rather than walking away," he insists. "Most people who are in debt want to repay what they owe, and IVAs offer a manageable way to do that."
The Government is now consulting on plans to introduce a faster, easier IVA called the SIVA, or Simple IVA. This is intended to encourage people to settle their debts and so ease their financial worries.
If you're in serious debt, your first port of call should be the Consumer Credit Counselling Service on 0800 138 1111; or the National Debtline on 0808 808 4000. Alternatively, visit your Citizens Advice Bureau; for your nearest office, go to www.adviceguide.org.uk
Personal insolvencies are at record levels, but one woman's story offers hope for those facing bankruptcy
Jayne Christie considered suicide as she struggled to hide her overspending and mounting debts from her husband. Now separated, she will soon be debt-free for the first time in five years.
"I was living beyond my means, spending to add a bit of sparkle to a relationship that was going nowhere," says Jayne, 33, from Birmingham.
She tried to save her marriage by paying for weekend breaks, romantic dinners and new clothes on credit. "I had two credit cards, a loan, an overdraft and owed money to several catalogue [companies]," she admits. "I was repaying only the minimum amount each month, and my £600-a-month salary was swallowed up by repayments, leaving me suffering severe depression. I was at rock bottom and considered suicide at one stage."
It was Jayne's doctor who advised her to seek help from her local Citizens Advice Bureau. By that time, her debts totalled £25,000.
"The adviser put me in touch with a debt advice company," she says. "They told me about individual voluntary arrangements [IVAs], and I'm now paying £250 a month for five years."
Jayne will have successfully completed her IVA next month, having repaid a total of £15,000.
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