Debt has been one of the biggest single factors to emerge during the recent recession as a significant issue that has affected many people from all walks of life. The economic growth of the 1990s and 200s was fuelled by access to relatively easy credit and given a low inflation, low unemployment world, we borrowed and spent as if there was no tomorrow.
Come the financial markets collapse and the subsequent recession and we now have to pay the price.
There were always consumers that struggled with debt. What the recent recession has highlighted is that far more people were exposed to high levels of debt than was previously thought and many sought to blame the lenders for pushing credit on innocent consumers whilst others blame the carefree attitude of borrowers to the consequences of unpaid debt.
Whatever the background, there has been a significant escalation in the rise in debt related issues that need to be addressed. One of the legislative changes introduced during the 1990s was a simple and effective method of clearing debts without the need for bankruptcy. Thus, the Individual Voluntary Arrangement (IVA) was born.
For many borrowers experiencing problems, it is possible to liaise with the lender to agree a short term moratorium on payments or a longer term rescheduling of the debt to make the monthly payments more affordable. Whilst this approach works well where a small number of lenders are involved, it is a voluntary arrangement where both sides can change their mind and either stop paying or enforce the loan terms and press for full payment.
Where the level of debt exceeds £15,000, more than three lenders are involved and a voluntary arrangement does not work or cannot be agreed upon, it may be necessary to introduce a more structured and legally binding arrangement for repaying debt.
Your licenced insolvency practitioner will work with your lenders to agree a debt repayment schedule over a typical 5 year period. Provided at least 75% of the lenders (by value of what is owed) agree, then the revised repayment schedule will be documented and approved by a court. You will then be obliged to make the payment agreed upon each month to the IVA manager (usually your advisory company who helped you set up the plan) who will make the necessary payments to your lenders. They will take a fee for performing this service. At the end of the IVA period and provided you have made all the payments necessary, any outstanding loan balance owed will be written off by the lenders and you will be able to start again with a clean sheet.
IVAs can be an effective way of managing yourself out of a serious debt position. They offer a number of advantages over bankruptcy in that the proceedings are private and unregistered and you need not disclose to your employer that you have entered into an IVA (unless you are contractually obliged to do so). Also, you will not lose your home but you may have to remortgage it to raise funds to pay lenders. If you are declared bankrupt you will lose your home and any other assets to pay what you owe. Equally, with an IVA you will still be able to hold bank accounts and apply for certain jobs that are restricted to bankrupts.
Whilst there are many advantages to an IVA, your credit history will still show that you have had serious financial problems and it may be difficult for you to raise credit in the future. However, successfully negotiating an IVA does provide some evidence that you can meet regular payment obligations and some lenders may still consider you credit worthy.
More recently, the charges for declaring bankruptcy have been increased making an IVA a more financially attractive option for many debtors. An additional £90 fee is to be added to existing court charges thereby increasing the pressure on already indebted families seeking this route.
There were 35,574 insolvencies in the last quarter of 2009 – a rise of 25% over the previous year. The Consumer Credit Counselling Services (CCCS), a charitable organisation which helps those in debt, saw a 93% increase in insolvency recommendations. There is a tremendous amount of free help and advice available to those in debt seeking a way to get their finances back under control. Small amounts of debt can be handled through a debt management plan or by sensible help with budgeting the family finances. More serious debt may need to be tackled with an IVA – but seek help and advice from the CCCS or the Citizens' Advice Bureau if you are unsure of what options may be best for you.