Can 75 per cent of your debts be written off?
Updated on 04 September 2006
Can debt management companies really get us out of the red?
Can debt management companies really get us out of the red?
The Claim
Take advantage of little known Government legislation to write off up to 75 per cent of your debts. Free debt advice.
The Debt People advert in the Daily Express, Wednesday 23 August 2006
Background
Consumer debt levels in the UK have reached epic proportions - and companies specialising in debt management are experiencing something of a boom.
The financial pages of mid-market newspapers are jam-packed with ads offering solutions to money problems.
The Debt People has been running one such advertising campaign promising to solve debts in 'five steps'.
It claims to provide 'free' debt advice and - using little known government legislation - reckons it can help consumers write off 'up to 75 per cent' of their debts.
Analysis
The Debt People is one of a growing number of companies taking advantage of a change in the law governing bankruptcy.
The change, which followed the Enterprise Act of 2002, has made bankruptcy an easier choice for people with high levels of debt; it allows bankrupts to be discharged within a year, and removes some of the stigma previously attached to insolvency.
Because insolvency has since become an option for a wider range of people, many of those in heavy debt are choosing to sign up to an Individual Voluntary Arrangement (IVA) - described as 'bankruptcy lite' - rather than the full-blown version.
In the second quarter of 2006 the number of people entering into IVAs rose by a record 153 per cent to 11,105.
IVAs were actually introduced in 1986 as part of the Insolvency Act; this is the "little known government legislation" referred to in The Debt People's ad.
But what is an IVA and can it really wipe off up to 75 per cent of debt as the ad claims?
IVA treatment
An IVA is a formal arrangement made through the county court between an indebted person and their creditors.
An Insolvency Practitioner puts together a proposal for creditors for the indebted person to pay off a percentage of their debt over a short period of time - usually between three to five years.
In bankruptcy proceedings creditors often end up with nothing and the indebted person could find their assets - including their property - seized.
With an IVA a creditor will be able to recover a percentage of the debt and the person in debt will pay back what they can afford within a given period of time - without losing all their assets.
Beccy Boden Wilks of the National Debtline said that an IVA is a good option for people with a high surplus income - people who can pay monthly repayments of between £250 and £300 - and who are keen to avoid full-blown bankruptcy.
"If you are in a profession in which you can't go bankrupt - such as the armed forces or the finance sector - then an IVA can be a really good thing," she said.
Contd.
Risky business
But she says that only a small percentage of people in debt benefit from taking out an IVA. These need to be high earners and ideally in rented accommodation as defaulting on an IVA can still lead to someone losing their property.
The problem is that IVAs are being marketed to a broader audience who may find their financial difficulties multiply after taking on an IVA.
"IVAs are being sold to people who can't afford the payments and who get tied into unrealistic proposals," said Boden Wilks.
"The difficulty is the way some companies are marketing them. Some are not giving the full picture."
Indeed, The Debt People's ads are marketed to a large, downmarket audience, through daytime TV and tabloid newspapers, and its advertising does not reveal either their conditions for qualification or the fees charged by companies for arranging an IVA.
But the director of The Debt People, Chris Daw, said that his company gives free debt advice and will only recommend an IVA in the right circumstances: "IVAs are only appropriate for a certain number of people," he said.
His company only takes fees as part of an IVA credit agreement that is drawn up and approved by creditors and its sales people do not work on a commission basis.
Profiteering
Other companies are not so scrupulous, charging fees upfront for facilitating an IVA, and tying consumers to an agreement - and fees - before an agreement is in place.
Ian Richards, money advice co-ordinator at the UK Insolvency Helpline, said that there has been a massive increase in adverts for companies specialising in IVAs, many of which are not offering independent advice for those struggling with debt.
Some sales people are pushing consumers towards IVAs when they may not be the right choice; others are signing up and charging consumers before an IVA has gone before creditors.
"They're not acting illegally. They're just profiteers," he said. "We advise people to go to an independent organisation or the Citizen Advice Bureau."
The DTI has no figures for the numbers of people defaulting on IVAs but the Insolvency Helpline's own research suggests that around 15 per cent fail in the first year, pushing people into even greater financial difficulties.
With some companies charging fees upwards of £4000 for facilitating an IVA, consumers are urged not to take debt solution advertising at face value.
FactCheck Rating: 2 (How ratings work)
Verdict
Accredited IVA companies can write off a substantial percentage of debt in certain circumstances, but an IVA is not the easy solution often portrayed in the media.
The Sources
Consumer Credit regulations: OFT (PDF)
The Debt People
The UK Insolvency Helpline
National Debtline
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