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 !

ClearStart.org making basic errors.

Clear Start are another debt solution company who claim to have a high volume insolvency department that processes hundreds of IVA applications every month - although it might be worth noting that, according to IVA.com, they only employ one IP to supervise this heavy workload.

Clear Start nonetheless claim to be a big player with considerable expertise in the consumer debt market and it therefore seems reasonable to ask why, if they have so much expertise, do they leave basic errors on their web site.

In their introduction to IVAs they claim for example that: ".... under either bankruptcy or IVA they are the same assets and income that are up for distribution to the creditors; it is just that it is the individual who proposes what will be paid into an IVA, whereas under bankruptcy the magistrate at the hearing decides what the outcome will be."

This is nonsense. Bankruptcy hearings are held in County Courts not Magistrate's Courts - an important legal distinction - and a District Judge (not a magistrate) decides whether the debtor should be declared bankrupt or not.

The district judge does not make any decisions about the debtor's assets at all. That is dealt with, in the first instance, by the Official Receiver and - if there are sufficient assets - the case may be handed over to an IP who will act as a 'trustee in bankruptcy' to arrange the distribution of assets to creditors.

Having failed to understand which court deals with bankruptcy petitions, Clear Start also lead into this display of their own lack of basic knowledge with the remarkable comment that: "The IVA was designed initially to be a more convenient means for processing individual insolvency cases without incurring the excessive costs and court time involved in bankruptcy."

This is simply misleading. IVAs were not designed for 'convenience'. They were originally introduced as an alternative to bankruptcy that would provide a greater return for creditors.

Indeed, when an insolvency practitioner acts as Nominee for an IVA they are required to produce a report on the IVA proposal which includes a comparison of the costs and the returns to creditors that would be achieved through bankruptcy or through the IVA.

IVAs were also originally designed for small business owners to enable them to continue trading their way out of insolvency. They were not originally intended to provide for personal insolvencies on the current scale.

To imply that IVAs are a less expensive solution is also wrong. The likelihood of the costs of 'processing' a bankruptcy being greater than the costs of a setting up and supervising an IVA are close to zero.

That's why so many debt providers are scrabbling to increase their share of the 'IVA market' - it's more profitable and, despite claims to the contrary, IVAs are also under-regulated and they have also been subject to less scrutiny by the courts than bankruptcies.

If excessive costs are being incurred, they are now very obviously being incurred - whatever the original intentions when they were introduced - in IVAs.

The suggestion that bankruptcies also took up excessive court time is also nonsense. Most uncontested personal bankruptcies are held in the judge's office (chambers) and they are over in a matter of minutes. An uncontested bankruptcy hearing probably takes up no more court time than an application for an interim order in an IVA.

So what ? Nit picking ?

Not really. When companies set themselves up to offer advice to often desperate debtors it is important that they get the detail right. IVAs stand or fall on points of detail in both the proposal itself and in sticking to the very precise requirements of the Insolvency Act.

When Clear Start lead their introduction to IVAs with references to bankruptcy that are either wrong, misleading or designed to scare - by references to magistrates courts and excessive costs - they are simply reinforcing negative images of a bankruptcy process that may actually be the best and most cost effective solution for the debtor.

If this is unintended. If there is no deliberate, cynical intent in their sales pitch then surely Clear Start should at least be able to get even the basic facts right about the 'product' they are selling ?

Displays of incompetence can sometimes be excused as endearing displays of human frailty but they might also prove very expensive for debtors. Caveat emptor.

Googling Bad Debt Advice

The UK Insolvency Helpline - I've 'borrowed' their warning sign - provide a useful and cautionary list of things to watch out for in adverts from debt advisers who may be mis-selling IVAs.

Insolvency Helpline - who are a network of accountants and lawyers - rightly flag up abuses by unregulated debt advisers and even provide links to help debtors complain to enforcement bodies about bad advice.

However, it's one thing to complain about the 'bad advertisers' - and it may even be possible to pick them off one by one until they are regulated by law - but it's another thing to deal with one of the primary sources of those adverts: Google itself !

Significant numbers of debtors find their debt adviser or IVA provider by searching online and most of the warning signs of bad debt advice listed by Insolvency Helpline can be found in the google ads that pop up with every search term related to personal insolvency.

One of the reasons why I've not signed this blog up for google ads is because I would have no control over the content of the ads and providing links from this site to a series of unregulated 'bad' debt advisors would defeat the object of the blog for the sake of a few quid.

Aren't Google in a similar position ?

In the first instance, their credibility relies upon their effectiveness as a search engine but, if the advertising that accompanies that service becomes increasingly questionable, then surely it would also be in Google's best interests to get ahead of the game and clamp down on the 'bad advice' ads before the regulators trundle into view and before googling simply refers in generic terms to 'online searches' rather than the brand leader itself.

There are other search engines.

Debtbusteriva.com - avoiding payment the legal way ?

During my research I came across this startling statement on the Debtbuster IVA web site : Don't believe websites or companies promising to wipe 100% of (sic) your debt - this is not legal! Avoid paying back 75% of your debt with us, the legal way.

It may be legal - but is this really the way to sell IVAs ?

I have looked at a lot of web sites over the past two years and I have seen a lot of dubious claims but I don't recall seeing any company promising to wipe out 100% of anyone's debt. But the Debtbuster statement sets up this 'Aunt Sally' and then claims that it is not legal.

It may not be an IVA but if there is a financial Svengali out there who can persuade all creditors to write off everything they're owed then why would that be illegal ? After all, if you haven't got a bean and you are made bankrupt then it is unlikely that creditors would get anything.

Personal bankruptcy is perfectly legal and in certain dire circumstances it is also true that creditors will be left with no choice - they will have to write off 100% of the money owed to them. That's why - in some cases - debtors are better off declaring themselves bankrupt rather than taking up an IVA.

But what of Debtbusters claim that debtors can avoid paying back 75% of their debt the legal way ?

This is misleading. The percentage of debt that any debtor will be required to pay under the terms of an IVA will be entirely dependent upon their circumstances. No insolvency practitioner can say in advance what the final percentage setlement (the dividend) will be. The figure has to be agreed with creditors.

Even if creditors did agree to a dividend of 25p - seemingly writing off 75% of their claim - that is the minimum amount that they expect to receive. If, during the course of the IVA, the debtors financial circumstances improve then they would be expected to pay more.

IVAs are not a legalised form of debt avoidance ! They were introduced as a means whereby debtors would be given statutory protection in return for the creditor receiving more money than they would be likely to receive in a bankruptcy.

If creditors cannot achieve a better return through an IVA they will simply reject the proposal and petition for bankruptcy.

The problem with sellers like Debt Buster is that their initial 'come on' gives debtors a false impression of what IVAs are all about.

Debt-Help-Direct.co.uk and the art of Frozen Interest.

There are some sweeping claims being made for IVAs out there in the debtorsphere.

They're not alone, but Debt Help Direct are claiming that "the interest on your accounts is frozen immediately" which gives the impression that you only need apply for an IVA and the interest on your debts is frozen.

Not true ! All of the lenders who can charge interest will continue to do so until the voluntary arrangement is approved by a creditors meeting and they have every right to do so.

If it takes a year to set up your IVA - it took eleven months to set up my moderately complicated arrangement - the lenders will keep charging interest even if they have stopped demanding repayments.

Example: If your debts include a bank overdraft then charges will continue at the current overdraft rate and if you are over the arranged overdraft limit you will also be hit for excess charges on a daily basis until the date when the IVA is approved by a creditors meeting.

The blunt truth here is quite simple. You may not even know what the total claims are against your IVA until all of your creditors have submitted their final proof of debt after the creditors meeting. That's the crunch time !

It is more than misleading for Debt Help Direct to post bullet points which suggest that interest charges are somehow magically frozen by some quick fix. It takes time to set up an IVA and the longer it takes the more interest you pay.

Are IPs targeting women ?

Is it a gender thing ? According to The Daily Telegraph it seems that two thirds of the people who opt for bankruptcy are men whereas women are more inclined to opt for IVAs.

The article doesn't give any precise figures but it does seem to highlight a trend that has been flagged up by a reputable debt advice charity. Seems a pity that the article didn't go that bit further and follow the logic of its own report.

The article refers to the fact that the Office of Fair Trading recently criticised seventeen firms for issuing misleading advertising which did not spell out the full implications of IVAs but it does not make the obvious connection with the TV advertising screened by IVA providers.

Most of the TV advertising for IVAs is screened during the day so we need to ask: Who is more likely to be watching daytime TV ? Are the IPs deliberately and succesfully targeting single women with a debt solution that may not appropriate for their needs ?

DebtFreeCoach recently recounted a familiar story of how an IVA went wrong for one woman and it is a cautionary tale. But one thing is certain - When it does go wrong it will happen regardless of gender.

The Numbers Game.

The 2006 insolvency figures have just been released and we now know that the number of individuals declared bankrupt in the last quarter of 2006 increased by 24.8 per cent on the corresponding quarter of 2005. That's a cool 17,063 people made bankrupt.

The real growth however was in the number of people in the UK taking out individual voluntary arrangements (IVA) and the numbers - compared with the last quarter of 2005 - were up by an incredible 81.9 per cent to 12,741.

These are very big numbers so it's salutory to bear in mind that these figures refer to activity that is controlled by a closed shop of self-regulating professionals. Let's not forget that, by law, only licensed IPs can set up and supervise voluntary arrangements.

But, let's also be charitable and assume that the IP nominee/supervisors fees on each new IVA was only £5,000, That would still give the IPs guaranteed additional fee income over the next five years of £63,705,000 - and that's just from crop of new volunteers in the last three months of 2006.

Did anyone else wonder how the bigger players managed to fund all of those TV ads telling folks how government legislation now enabled them to pay off only a fraction of their debts ?

Insolvent, underground and digging in the dark !

I may be digging in the dark but I know a rat when I smell one and some of them are insolvency practitioners (IPs) cleaning up in the current rush for voluntary arrangements as an alternative to bankruptcy. When an IP starts selling voluntary arrangements (IVAs) as a 'lifestyle choice' it is a certain bet that the only lifestyle that they are enhancing is their own.

Insolvency Practitioners are of course entitled to charge a professional fee but how much is appropriate ?

Some IPs quote a fixed fee for providing an IVA but that may not be written into the Proposal and, even if a fixed fee is written in, that's no guarantee that the IP will not take more. My creditors had reluctantly written a limit of £14,500 into my arrangement and, to date, my IP has taken £27,000 and I have spent two years fighting through the courts to recover that money for my creditors.

My case is probably exceptional but fees running into many thousands are not unusual.

But why charge so much ? IVAs are not rocket science. In most cases the work is more or less over in the early stages and it's simply a question of gathering information from the debtor; amending a template Proposal provided by their trade association and offering the proposal to creditors.

Then the IP follows a number of fairly straightforward steps to make sure everything is set up in accordance with the law - Section VIII of the Insolvency Act and the Insolvency Rules - up to the creditors meeting.

Once the IVA has been approved, it is then a question of agreeing all of the creditors' claims made against the voluntary arrangement and from there on it becomes a very inexpensive book-keeping exercise.

The debtor pays money in every month and the IP takes his fees and, if there's enough left in the kitty, some money is eventually paid out to creditors as a 'dividend' based on a proportion of the money owed to them.

It's not rocket science but this is where insolvency practitioners charge for doing very little. A very junior employee does the basic work and it's only necessary for the IP to sign another (proforma) annual report and statement of accounts. Copies are then sent to creditors and they are also filed with the County Court that is supposed to have jurisdiction over the arrangement - but the courts never look at the reports. They are quite simply filed.

And there lies the problem - and the reason for this blog - this 'regulated profession' is not directly regulated by anyone despite the fact that IPs are given statutory protection from civil legal action. This statutory protection is open to exploitation by unscrupulous, incompetent, lazy, negligent and sometimes barely qualified insolvency practitioners and the losers are vulnerable debtors and the creditors who also end up not receiving money due to them.

The mole will be scratching away to cast light on this darker side of insolvency.