Big IVA Problem

Are over-stretched borrowers being thwarted in sorting out their debts? Or are IVAs too expensive? David Stevenson investigates...

Many struggling over-extended borrowers may be denied the best way of sorting out their debt problems without going bankrupt, according to insolvency pressure group the Debt Resolution Forum (DRF).

Banks and credit card companies are setting out to frustrate effective debt resolution in the UK at almost any cost, claims the DRF which represents 28 of Britain's debt management companies offering Individual Voluntary Arrangements (IVAs). (These are pledges between debtors and creditors that freeze loan interest and slash repayment amounts.)

IVAs fell by 15% in the second quarter of 2007 and the DRF claims this is not due to slowing demand. Instead it reckons that tougher IVA conditions imposed the by the banks and credit card companies are leading to hundreds of clients being advised every week that an IVA is no longer possible for them.

The banks are pushing for higher payments from the distressed borrowers, and lower upfront fees charged by the IVA providers.

The insolvency industry has been working hard this year to try and find a solution. If a workable new deal can't be reached, DRF sees a debt crisis ahead and a likely "explosion" in bankruptcies, ironically meaning lenders would lose out much more.

IVAs require 75% creditor approval to be implemented, so that if banks refuse their agreement, there's no deal. And creditors have been getting as little as 10%/15% of their money back under an IVA.

Mark Hover, head of The Insolvency Exchange (TIX) which represents HSBC, HBOS, RBS, First Direct and Marks & Spencer Money, denied that banks were making it more difficult for debtors to access IVAs.

"We want to see more acceptable returns to creditors. And also the IVA providers are still charging a 'specialist' fee for what is now a 'commoditised' product. The average IVA fee is about £7500 and we believe this should fall to nearer £5000 to reflect the lower administration charges incurred on the majority of agreed IVAs."

TIX says that the banks have not been rejecting more IVAs and acceptance rates have remained steady at around 80%. However, in contrast to the DRF view, TIX believes that lower fees would actually encourage more over-indebted borrowers to take the IVA option.

The backdrop is that Britain's borrowing problems continue to mount.

Personal debt as a proportion of income has grown from 105% in 1997 to 164% in 2006. That's the biggest percentage ever recorded and the highest level in the developed world. And it's still rising.

Research conducted by Ipsos MORI indicates that nearly 10% of Britons see personal debt as the top issue facing the country today.

More than 160,000 people contacted the debt charity Consumer Credit Counselling Service (CCCS) in the first half of 2007, an 18.5% increase on the same period last year. A total of 247,187 consumer debt related County Court Judgments (CCJs) were issued in the first three months of this year, the highest quarterly total since 1997.

And recent data showing that UK house repossessions have reached their highest level in eight years, up nearly 30% on the same period a year ago, darkens the picture further. With home loan rates climbing and many fixed-rate deals expiring over the coming months, imminent higher mortgage bills could push more Britons into the red.

So let's hope the warring factions can sort out their IVA issues. Soon.

If you have a serious debt problem and you don't know what to do next, start by reading Neil Faulkner's article, Five Top Ways To Clear Your Debt, which could help you decide whether an IVA is the right approach for you.

You'll also find lots of great advice and support on our Dealing With Debt discussion board.

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