Debt Advisory Companies Are Getting the Huff

Debt Advisory Companies have been getting the huff recently as their share value has been slashed by as a third. The claim is that UK banks are adopting a blocking approach to the IVA (Independent Voluntary Arrangement).

Debt Advisors have recently had an easy sell to people in debt. Many have been suggesting that the IVA is an alternative to bankruptcy that is less drastic and with fewer stigmas attached to it. It is sold to the borrower as an easier option than bankruptcy where part of the debt is written off if the debtor agrees to a 5-year (or less) payment plan.

What borrowers are not told is that a Personal Insolvency Practitioner (PIP) must oversee an IVA. A PIP, of course, must also be paid. Let me share with you what happened to a subscriber to the debtfreeandhappy.com e-course, before she knew about our website.

She had 45,000 of debt that her PIP would “negotiate” settlement on. She signed a 5-year agreement on the understanding that she would have to produce documentation each year to declare her earnings. She agreed to pay c350 per month. However, if she defaults any any time within the 5 year period then she will have no alternative but to declare bankruptcy. If she increases her earnings then she may have to pay more to her creditors. By the end of the 5 years, she will have paid 21,000 out.

That might seem like a good deal, right? After all, many personal loans are spread over 3-5 years, right?

However, let’s look more carefully. Not only do the above restrictions apply, but unlike taking out a personal loan, she is unable to access any credit at all, including credit cards, mortgage etc.

Again, you might think “Well that would be ok for me. I’m useless with credit cards anyway” or “Well I don’t need a mortgage anyway”. BUT, if you knew (without doubt) you could change the way you think about money and start making money work for you rather than you working for your money, would you want to know more? Of course you would.

And it is possible to change the way you think about money. Credit is meant for those that CAN AFFORD it, not those that can’t afford it. Credit should be used to create more money. A lot can happen in 5 years – just look at house prices in the UK. In 5 years you could go from broke to debt free or even become a millionaire. Just look at the number of millionaires created by the Internet.

Let’s get back to the client – in the agreement (which she never read in full) of the 21,000 the client is paying to her IVA over the 5 year period, 13,900 is paid to the PIP. Leaving just 7,100 to her creditors.

When she realised she was horrified. She thought she was paying back 21,000 to her creditors..(By the way, I’m not saying the PIPs shouldn’t be paid – of course they should! They are offering a service after all. What antagonises me is how the agencies advertise, “Pay off your debts for FREE”. It’s not free. Nothing is free. You’ve probably heard the phrase “There’s no such thing as a free lunch”. Think about it.) OK, I've had my moan now :-)

In order to negotiate a settlement, there is a requirement that 75% of creditors must approve the IVA. Debt advisory companies whine that banks are seemingly blocking IVA’s and are demanding better terms, they also claim that creditors get back between 30-45% of their money. However, the above case study shows that this is not necessarily true. Granted, the debtor may PAY BACK 30-45% of the debt, but that doesn’t go straight to the creditors – remember the PIP must be paid too.

I believe banks and lending institutions have a point. These organisations, particularly banks, have been criticised many times for so called “irresponsible lending”. Now they are taking the lead on that – and quite right.

It is so easy to sign up to an IVA, so the question is: If you sign up for one, will it make ANY difference to your spending habits? The answer for most people is a resounding NO. It won’t make any difference whatsoever. In fact, I have noticed a pattern with most people in chronic debt – no matter how many times they pay the credit cards and bills off in full, no matter how many consolidation loans they get, no matter how many times their relatives bail them out, THEY STILL GET INTO MORE DEBT!!!! In my next posting I will share more on the mindset change required to get out of debt and stay out of debt.

And lending institutions are also recognising this. So now borrowers will need to consider the views of the lending institutions much more in the future. And lending institutions will be taking a much closer look at your status when making decisions and/or even lending money