Banks and other lenders are now relaxing their payment thresholds for individual voluntary arrangements (IVAs) and are approving lower-repayment applications for the first time, according to Debt Free Direct, a provider of IVAs.
Previously, only debtors able to commit to monthly payments of at least £200, paid over five years, were accepted, which is beyond the means of many people. In the past few months, though, creditors have agreed to hundreds of more flexible IVAs with monthly payments of under £200. With this apparent change in attitude, Debt Free Direct is now encouraging consumers who have previously been denied to re-apply, but is it a good idea?
The main IVA selling point, as an alternative to bankruptcy, is that debtors are able to reduce their debts to a single monthly payment and have a legally binding agreement to become debt-free upon completion of the arrangement. From the creditors' point of view they can claw back a proportion of what they are owed in a relatively short amount of time, and IVAs offer better returns for lenders than bankruptcies.
While lower monthly payments may be welcome to some debtors who would have been unable to meet a £200 payment, undertaking an IVA is an extremely serious step and there are considerable costs involved. "When people look at debt solutions they do tend to look at the monthly payments but that isn't the main figure to look at. It's about making an informed decision and knowing exactly how much it's going to cost," says Beccy Boden Wilks from the National Debtline.
An IVA involves setting up a fixed payment plan between the debtor and creditors. It must be arranged by a licensed insolvency practitioner who prepares a financial report for court proceedings. Provided 75 per cent of the creditors accept the proposal, the IVA is legally binding, interest is frozen on the debts and as long as all the terms of the arrangement are met, the payments will be considered a full settlement of debts. But there are costs. First, there is a fee, typically around £1,500, paid to the insolvency practitioner for setting up the IVA, which may need to be paid upfront. Afterwards, commissions are taken out of the monthly payments as ongoing supervisory fees, which significantly reduce the amount being put towards the debt. The monthly payments are fixed, which could spell trouble if a change in circumstance rendered payments beyond reach, and, during an IVA, the debtor is unable to take out credit cards or loans.
IVA providers also have a tainted reputation for aggressive marketing to people for whom it is not appropriate. The Consumer Credit Counselling Service (CCCS), recommends IVAs in a mere 2 or 3 per cent of cases. Despite this, in the first three months of 2009 the number of IVAs hit the 10,713 mark, an increase of 11.8 per cent on the same quarter of 2008, according to statistics from The Insolvency Service. If lower monthly payments trigger growth in the market there is a risk that more people will be persuaded to take one up. "It is possible that clients who did not previously qualify for an IVA, but who now do so, may be pushed into entering an IVA when it is not the best option for them," says Tom Howard from the CCCS.