Debtors struggling with repayments can, from the new year, expect slightly increased protection if they enter into an Individual Voluntary Arrangement (IVA), a type of debt management plan.
Trade bodies representing companies that provide IVAs have spent months fighting with the creditors - mainly banks - who have been routinely rejecting these debt repayment plans. Now, after a year, the two sides have reached a tentative agreement and will follow new guidelines to deal with those in debt.
For an IVA to be successful, a lender must agree to write off a proportion of the debt in exchange for set monthly repayments over five years. The problem has been that banks have been setting their 'hurdle rates' - the number of pence they expect to get back in the pound - increasingly high. The banks have defended their decision to raise these rates by saying that the IVA companies are tempting people into them through misleading advertising, and that most of the money paid by the debtors goes in fees to the IVA company. The result of this ongoing argument has been that many debtors have been waiting weeks to sort out their debt problems, only to see their IVA proposal rejected and instead be forced into bankruptcy.
From 1 February, the code of conduct will include the following stipulations:
· The financial statement that debtors are asked to complete, detailing their income and outgoings, will be standardised to follow the model established by debt advice charity the Money Advice Trust. This will include the need for insolvency practitioners to carry out more stringent checks on income and mortgage repayments.
· There will be an agreement as to when a debtor will be deemed to have failed the IVA if he or she gets into arrears with monthly repayments.
· All previous attempts by the debtor to settle debts with their creditors will have to be disclosed in the IVA proposal. In practice, this means an insolvency practitioner will now have to tell a debtor to try for an informal agreement with creditors before recommending an IVA.
· If a lender rejects an IVA, it will now need to give a specific reason justifying that rejection.
The new code will apply only to straightforward IVAs - those where the people applying have a regular income and where they have three or more credit card debts from two or more lenders. It will not cover more complicated cases - for example, where the applicant is on state benefits.
'From February the man on the street will be able to be confident that, if he goes to an IVA practitioner that has signed up to these standards, he will be guaranteed that IVA will go through,' says David Mond of trade body the Debt Resolution Forum, which has been driving the reforms.
However, Nick O'Reilly, the vice-president of R3, another IVA trade body, disagrees. He says the two main sticking points to an IVA being agreed - the hurdle rates and the fees paid to the IVA company - have not been settled, and the two sides are still arguing about this.
'If a consumer comes to me for an IVA and we draw something up that meets this new code of conduct, it could still be turned down because of the two big sticking points,' he says. 'However, we are giving this new understanding a cautious welcome, as it does mean we now agree on a lot of terms.'
Terry Balfour of the website IVA.com, says one bit of good news in the past year is that fees associated with IVAs have come down and insolvency practitioners have stopped charging by the hour. Fees over the five years of an IVA, which are incorporated into the debtor's repayments, now average between £5,000 and £7,500, he says, though in the past they have been as high as £9,000.
IVA.com has a unique feature that allows users of the site to post reviews of their IVA company. One user, who gave her IVA company four out of a possible 10, said: 'I have been in the IVA for almost 18 months, we pay £527 a month and live on very little sometimes, which is extremely hard.
'Your money is not your own, the only carrot is being debt-free after five years, but I'm not sure if it's worth all the stress. I should have communicated more with my creditors and tried to work out an alternative.'
O'Reilly points out that anyone who is in serious debt would be better off talking to their card and loan providers as soon as they start running into problems. 'If you agree things informally with your creditors early enough, it is far cheaper for both the debtor and the banks than an IVA,' he says.
Source The Guardian
IVA.co.uk Spokesperson and Website Manager
IVA Helpline: 0800 197 4838