To IVA or not to IVA…
An acquaintance of mine has recently been looking at ways to cut their excessive credit card debt. Having been phoned with the offer of a “debt management scheme” (where do these people get their information from?), my friend asked for an information pack and for me to investigate what the options were.
The card debt my acquaintance (let’s call her Wilma) is dealing with is about £25,000. She is currently spending about £800 a month just to service those debts. She reckons she can afford just under £200. Obviously, something has to give. My first reaction was really negative. I assumed that this was an IVA arrangment, whereby she admits the problem, refers it to an insolvency expert who negotiates with the creditors to freeze everything, whilst Wilma pays it off as fast as she can, and after 5 years, having done all that she can, the rest of the debt is written off. My thoughts? Wilma works from home, and any black mark against her credit will affect her small business, making it difficult to expand or gain business loans at any later date. QED: avoid an IVA.
However, having done some investigation, I’m not so sure. An informal debt management scheme (which is what this 3rd party company were offering her) has the following problems:
- If there is nothing in writing, the creditors can change their minds at any minute
- The management company take 15% of the monthly payment as their fee
I haven’t seen the paperwork yet, but I do wonder what the motivation for the creditors to abandon their outstanding amounts after 5 years is, if it isn’t an IVA and an understanding that the situation just isn’t going to get any better…
After looking at what information I have about the situation and the possibilities currently open to Wilma, I don’t think that £25K is bad enough to warrant throwing up her hands in despair and opting out with either an IVA or a debt management plan. I certainly think that the “15% management fee” would be better put towards paying off her bills herself, and that she is in a position where she can work her way out of the problem. She has a job, she has family members willing to help out with loans and work, and she has a very “can do” attitude.
Whilst I don’t think that an IVA is necessarily the Big Bad that I thought it was, I would far rather see Wilma fight her way out…
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Comment by plonkee
It’s not the £25k that’s the problem, it’s that if she can really only afford to pay £200 per month, then she needs an 10% or less loan, just to be able to afford the interest payments. With an loan at 5%, it’ll take nearly 15 years to pay of £25k at £200 per month.
I imagine the the upside for creditors is that they are likely to get more of their money back, than if there was no agreement in place, since many borrowers default.
I actually think it’s possible that an IVA might be a good situation for your friend. A consolidation loan might also work, *if* they’ve truly given up using their cards. Otherwise, it’s likely to be a disaster.
Of course, the issue might be that if they tightened their belts, they could afford to make considerably more than £200 in debt repayments.
Comment by Annie
Plonkee: You are on the nut with the last comment. I think a lot of people, including Wilma, can tighten their belts if necessary. I know that my husband and I have taken a lot of small steps towards reducing our CO2 footprint, and as a consequence are looking at a saving well in excess of £1.5K a year. It’s not even being particularly revolutionary, just dumb, everyday things like only boiling a cup of water at a time and turning lights off in rooms we’re not in. In the past 6 months we’ve actually cut our electricity bill in *half*, and anyone can do the same.
After my research, I felt a lot more positively towards the IVA than I had before – I’m glad that I’m not in this situation myself, but it does seem to offer a lifeline to a lot of people.
Comment by Talis
Hmm. You have a good point re the reduction of outgoings – I recall at one stage in my life going through the list of direct debits and just deciding what to not do or have anymore. Coupled with a revised weekly food budget, quite a dent was made in the outgoings, I recall. Has Wilma actually stopped doing whatever got her there in the first place?
Otherly (what do you mean, it’s not a word?) if you tell creditors that you want to negotiate a payback at *affordable amount* per month, (in writing – please, always in writing! If they respond by phone, make notes and get the name of the person talking to you.) they should let you – their only alternative is to take you to court and get a liability order, or whatever it’s called these days. And the Magistrate will ask you about your budget, and you will be frank about that, and the Magistrate will ask if you are willing to pay, and you will say’yes, I wrote to them offering (whatever) on (whatever date) and proffering copies of the correspondence. If you have several creditors, a sensible magistrate (and they mostly are) will require you to make proportionate regular payments to them all – to be seen to be trying to pay back withing your current means. If you’ve already offered this, the mags can’t do much to hurt you. Even liability orders fade in time, they don’t linger on your record forever. Plus you get the satisfaction of making the creditor accept what you were trying to offer in the first place.
From my recollection, mags want to know (a) do you accept that you owe this money? (b) what means do you have to pay it back? and (c) will you accept an arrangement to do so in regular instalments?
What creditors do is to threaten you with court because they think it will make you pay up at once out of fear. In fact, calling their bluff if they refuse your reasonable offer may be the best thing. They end up having to accept a sensible deal, and can’t threaten you any more.
I am not a lawyer, but that’s my thinking on it.