IVAs are not a 'Debt Solution'

IVAs are not a 'debt solution' they are a declaration of insolvency - but the IVA touts insist on selling and advertising voluntary arrangements as if they were a form of legalised debt reduction. They appeal to a desperate and often deep-seated wish to shake off the stress of financial problems and to be able to simply walk way.

If only it were that simple.

The majority of people in the UK are in debt. The majority of people could not afford to repay their mortgage if a demand for payment in full dropped through their letterbox tomorrow but they can afford to meet their mortgage repayments when they fall due. That is the test.

A debtor is only insolvent if their liabilities exceed their assets - the 'balance sheet test' - and if they are unable to meet the repayments on their debts when they fall due - the 'cashflow test' .

Failure to make a number of payments may also not be enough to mean that someone is insolvent. There may have been hiccups in payments that lenders have accepted and sensible arrangements have been agreed for payment of arrears.

The problem - and the insolvency - arises when matters have gone past that point and there is little prospect of ever being able to recover the situation. At this point, when the instalments on personal debts are overdue and cannot be paid and when the prospects of an informal arrangement with creditors have past then there are only two choices: an IVA or bankruptcy.

The courts take a passive role in this and problems can arise because the County Courts do not apply any kind of insolvency test. Debtors can be made bankrupt for non-payment of any debt in excess of £750 although they may not actually be insolvent.

Bankruptcy was not intended to be the automatic consequence of unpaid debt. It is supposed to be a consequence of insolvency but the court's scrutiny of the bankruptcy process is often perfunctory and the Official Receiver (OR) is left to sort out the detail.

There is however one saving grace in referral to the OR. If they decide that a post-bankruptcy Fast Track Voluntary Arrangement (FTVA) is a more appropriate solution to the debtor's insolvency then the bankruptcy can be struck out and a FTVA - with the Official Receiver acting as both nominee and supervisor - is a less expensive process than the IVAs provided by the private sector IVA profiteers.

But, welcome as they are, it should also be acknowledged that FTVAs only exist because of failings in the pre-bankruptcy process and the mis-selling of IVAs has become an increasingly aggravating factor in that stressful process.

IVAs are being sold, on the one hand, as if they were a debt avoidance solution and a lifestyle choice rather than a declaration of insolvency and, on the other hand, they are are also being sold to the truly insolvent who should really be declaring themselves bankrupt.

Too many debtors are entering into IVAs which simply result in the payment of excessive fees to the unscrupulous or incompetent insolvency practitioners hiding behind the IVA factories. Creditors can often receive little or nothing.

Debtors are sucked into these inappropriate IVAs because the touts also exploit the fact - all too frequently overlooked - that many of the people struggling with debt are struggling because they are trying to do the right thing. They want to keep up with their repayments and they often carry on fighting to do that long after they should have given up the struggle.

IVAs help assuage the guilt that comes with not being able to pay back money that is owed. Debtors are led to believe that they are least paying 'something' back to their creditors. The sad reality is that they will be disappointed because they have been misled by IVA providers who make blatantly dishonest and misleading claims about the fees they charge.

An ombudsman or an independent regulator with statutory powers is needed now !