Beware bad advice

We’ve mentioned on our web site how confusing it can be to get reliable advice about personal debt. Regrettably there are many websites that contain incorrect information and advice, often written by those who wish to steer you in one particular direction.

As an example of this, we set out here a typical example of the advice that you may come across, together with our responses. It will help you to understand some of the misconceptions about IVA’s and whether one would be right for you.

Remember, our comments assume that we have had the opportunity to review with you your financial position and have recommended that you should consider an IVA.

Click on a myth to reveal the truth!

• Many people contact us and say that they have been advised to enter into an Individual Voluntary Arrangement. A large number of debtors have their IVA proposals rejected by creditors. An IVA is right for some people, some of the time. However if you have few assets and little income, but you have debt you cannot manage, a bankruptcy may be right for you.

  • Not true. A well constructed IVA proposal should stand a 90%+ chance of approval by creditors. Remember, we will not charge any fees if an IVA proposal is rejected and so it is not in our interest to recommend an IVA to you if we did not think that it would be approved.

• Those proposing IVA's will generally say that the stigma of an IVA is less than bankruptcy. For this they cite the fact that the bankruptcy is advertised in a local paper. It is, but ask yourself if you have ever read such a notice? If you did what did you think? You see, nobody cares. Stigma! What stigma we say.

  • It is no longer mandatory that details of bankruptcies are advertised in local newspapers although it may still happen, if the trustee in bankruptcy considers it appropriate. The stigma of bankruptcy is a personal issue and only you can decide how you feel about it.

• They say after completing the IVA you are debt free. True, but to complete an IVA you must pay your agreed monthly payment for 60 or 72 months. If you fail to make all those payments you may be made bankrupt anyway. So you will have paid possibly many thousands into an arrangement and still end up bankrupt.

  • The standard IVA proposal is written for 5 years with provisions for it to be increased or reduced, if your circumstances change. The choice is always yours. You will never be obliged to continue with an IVA if you do not wish to. The standard IVA proposal also specifically states that you will not be made bankrupt if your IVA fails and the money that you will have paid in will be paid to your creditors.

• They say up to 75% of your debt can be written off. Yes it may or, depending on what the creditor perceives as your disposable income, you may actually pay all the debt back plus fees. This is true, but no one ever tells you before you agree that they can draft your proposal.

  • There is no maximum or minimum amount of debt write off, it all depends upon your circumstances. Unlike a debt management plan, however, all further interest and charges are contractually frozen which, over the life of a 5 year IVA, would be a sizeable amount.

• They tell you that you pay back what you can afford. Actually, the creditors prescribe what they will allow you to spend each month and you need to keep to that budget to meet the amount the creditors require you to pay into the IVA. What you propose and what your creditors demand may be two completely different figures.

  • Yes, there is a standard range of expenses that is agreed with creditors but if your personal circumstances make it impossible to accept that budget, it is always possible to seek a higher allowance and justify the need within your proposal. What is not said is that a very similar method is used in calculating what you will be required to pay in to a bankruptcy for a three year period.

• They say an IVA will help repair a person's credit rating. Not true. An IVA is an insolvency procedure like a bankruptcy. It will take six years for your credit rating to be fully repaired in either case.

  • To an extent this is true but your credit rating is not the only consideration. On many occasions, such as applying for a new job or providing references for landlords, you are asked the question "have you ever been made bankrupt?" It is far less common to be asked "have you ever been in an IVA?" Furthermore, a successfully completed IVA is likely to be viewed as a more positive reflection of your credit worthiness than a prior bankruptcy.

• An IVA will bind you for five to six years. You will be discharged from bankruptcy in twelve months and if you have to make any payments at all this will be for only three years.

  • If your disposable income would be enough to make a payment in to an IVA you can be fairly sure that it would be enough for you to be required to pay a monthly amount in to a bankruptcy for three years.

• Your creditors will demand every last penny from you. Not so in bankruptcy. The Official Receiver will allow you £60 per month against the cost of a holiday.

  • True. Expense allowances are different for IVA’s and bankruptcy. As further examples, in a bankruptcy you will not be provided an allowance for a mobile telephone and you will have to justify that you need a motor vehicle for work purposes because of a lack of public transport. Furthermore, you will not be allowed to use a motor vehicle with a value exceeding £2500.

• Many IVA practitioners say that the family home is protected. This is not true. Any IVA will require that the debtor attempt to put in equity in a home in year four. So if you have no equity now, you may still have to re-mortgage in year four to release equity. In bankruptcy, if there is no equity on the date of the bankruptcy, you can have the bankrupt's share transferred to a spouse for £1 plus costs.

  • On the other hand, in a bankruptcy, if you do have equity you will have to find a way to pay that amount to the Trustee in Bankruptcy to avoid the home having to be sold. Furthermore, in the standard IVA proposal it specifically states that you will not be required to sell your home and if you are able to remortgage the maximum amount is restricted to 85% of the value of your home.