One of the most popular debt management solutions
taken up by UK consumers at present is the IVA
or Individual Voluntary Arrangement. This kind of solution allows you to work out a deal with creditors that sees you pay back some or all of what you owe them within a specified period of time (usually six years). Once the IVA is over, any debts that still unpaid are written off with the agreement of your creditors.
In many cases, of course, this means that creditors will not be able to get back everything that you owe them. Some consumers find that they can write off up to 75% of what they owe here and the agreement also often asks creditors to freeze interest payments when the IVA is in place.
This is hardly the best deal for them on paper. They will have to accept lower monthly payments, may well end up agreeing not to charge any more interest on the money you owe them and they are virtually certain to get back less than you would have to pay under their standard terms. So, why do so many banks, credit card companies and other lenders agree to IVAs so readily?
The fact is that they have to take the view that something is better than nothing here. If you have serious debt problems
then there is the very real chance that you will walk away from your debts which will leave your creditors with nothing. And, unlike other solutions such as debt management plans, an IVA is a legally binding contract that you have to commit to. If you agreed a debt management plan with your creditors on an informal basis, for example, then, once again, you could simply walk away from it if you felt like it.
IVAs are often viewed by creditors as a good deal because they know that they will at least get 6 years of regular payments. If you took the alternative here and declared yourself bankrupt (or if they had you declared bankrupt) then they could actually see a far lower return. Bankruptcy only lasts for around a year and involves the selling of assets rather than just regular repayments.
So, if you owe a lot then your creditors will have to form a long queue to see any returns from bankruptcy, especially if you have few assets and have little income spare to put towards repayments. Given that they may only see a return of pennies in the pound then it’s hardly surprising that an IVA is a better option for many of them.
Many creditors will actually breathe a sigh of relief if you opt to take the IVA route and put a proposal to them for this reason alone. It is worth remembering, however, that you can only set up an IVA with the agreement of your creditors to a certain percentage. It is important, therefore, to work with your Insolvency Practitioner to make sure that you propose payments that you can both afford and that will make accepting your IVA worthwhile for your creditors.