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"banks Blast Debt Relief Claims"

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Banks blast debt relief claims

Michael Clarke, This is Money

5 September 2006

TYPE the words Individual Voluntary Arrangement into Google and you'll be presented with a plethora of adverts from companies claiming they can clear your debts.

'Write 95% off your debts' screams one, 'Up to 75% of debt written off' claims another, while a whole host of others promise they will leave you debt-free in just five years.

They are typical of the type of advertising that is beginning to agitate UK banks and money lenders. There is growing concern that IVAs, a legal agreement where the borrower pays back some of what they owe in exchange for the lender waiving some of the debt, are being too aggressively marketed to over-indebted consumers.

In their latest round of stock market reports, banks blamed IVA's and the companies that market them for the rising levels of bad debt, although it can be argued that they shouldn't have lent the money in the first place.

The sale of IVAs has grown rapidly in recent years. According to the most recent set of statistics, there were 7,961 IVAs in the second quarter of the year – triple the number recorded during the same period in 2005.

The situation has become so bad that the insolvency industry and banks have organised a series of 'rolling summits' to discuss IVAs before lenders start abandoning the process.

Banks claim they accept that IVAs are an effective debt management tool, but they are concerned that consumers are not being given proper debt advice. Although the insolvency practitioner who proposes an IVA must be regulated, there are no strict rules surrounding the companies that market them.

British Bankers' Association director Eric Leenders says: 'We think some of the advertising doesn't represent the reality of taking out an IVA.

'For example, you see an advert to clear 95% of the debt, but what the consumer probably doesn't realise is that they may be required to remortgage their home at the end of the period to release the equity.'

He added: 'We are concerned at some of the advice being given to these consumers and whether they are being given the full range of options for their debt problem. We have seen cases where a person has been advised to take an IVA when a normal debt management plan would have sufficed.'

Debt charity the Consumer Credit Counselling Service says it recommends IVAs to between 3% and 4% of callers and insists it is not a mainstream debt product. But banks are saying they are receiving increasing numbers of unsuitable proposals.

IVAs are suitable for people who are employed full-time, own their own home and owe more than £10,000 in total to three or more creditors. However, there have been cases where people on benefits have taken out an IVA and where the repayment stretches the individual's budget to such an extent that the contract fails.

There have also been accusations that some debt management companies have charged customers for advice, even though an IVA is supposed to cost the debtor nothing.

IVA firms expect to make an average of £7,000 per client. They charge a 'nominee fee' of £2,500 at the start of the contract and then a further £900 a year in supervisory fees. Although these fees are charged to the lender, the nominee fee will come out of the debtor's first-year payments.

If the IVA fails after the first year, the debtor will have cleared nothing off their debt, the amount owned will revert to the pre-IVA level and there is a strong chance the person will have to apply for bankruptcy. However, the debt company will have kept their nominee fee.

Pat Boydon, insolvency expert at accountants PricewaterhouseCoopers, believes current regulations are strong enough but should be adapted to include the firms that market the IVAs. He says: 'At present, it's only the individual that proposes the IVA who is regulated, but we have seen entrepreneurs move into the market because they have seen the demand.

'Where as an individual would have been handled by a firm of accountants or insolvency practitioners in the past, now they are targeted by a company specifically set up to process IVAs that employs one or two insolvency practitioners.'

But it's not just the banks and creditors that are calling for wider regulation, some of the debt management companies are also calling for change. Market leader Debt Free Direct claims tighter rules would drive out rogue companies.

Chief executive Andrew Redmond said: 'We have long campaigned for Government regulation that would ideally enshrine the principle of providing the consumer with best advice.

'That would mean best advice for the individual with the debt problem, as opposed to what is best for the lender or those who are offering the advice.'

The call for regulation should become louder next year when new simplified IVAs will be introduced. While details have yet to be confirmed, the change should mean debtors only need the approval of 50% of creditors to approve and a standard application process introduced.

Both lenders and debt management companies have welcomed this change as it should bring down costs, but it is also likely to lead to a much greater demand for the IVA product.

In other words, the banks are saving "Remove the negative feedback on our scandalous lending practises and we can lend more!". Unfortunately, legislation looks like it is being changed to allow IVAs to be taken out even more easily.

2007 is going to be an *interesting* year. :blink:

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I don't know why the banks are so upset. Many of these IVA merchants are stopping debtors from going for bankrupcy, which for some people would be the best bet. Parasite bankers didn't want regulation when they were lending vast sums to anyone with a pulse.

Parasites feeding off parasites.

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I don't know why the banks are so upset. Many of these IVA merchants are stopping debtors from going for bankrupcy, which for some people would be the best bet. Parasite bankers didn't want regulation when they were lending vast sums to anyone with a pulse.

Parasites feeding off parasites.

And who ius paying for it ?

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There was a small article in the metro this morning (which I'm surprised went un-noticed on here) about bumper profits at the company that leads the market in arranging IVAs. Apparently the number being arranged per month is soaring as people struggle to service the ludicrous amounts of debt they've piled up buying flat screen TVs and Audi A3s.

Surely these figures, along with the increase in repossesions and bankruptcies are a clear sign that the economy is on the brink?

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I got into some serious debt around 7-8 years ago and I looked into IVA, but it worked out that I was paying the IVA company loads of money and if I failed to pay I could lose my house, there was absolutely no flexibility and if I missed even one payment over the next 5 years I was in big trouble.

I then looked into a secure loan on my house, but decided against that too. I spoke with all the companies I owed money to (with the help of the CAB), I agreed settlement figures with them. I then sold my house and cleared all my debts and left myself with a decent amount in the bank.

By the following year I had managed to save up some more and buy another house.

Ive known a couple of people who have taken out an IVA and none of them managed to stick to them. The problem was, the lack of dicipline that caused the problem in the first place still remained. Also they were still able to get credit through catalogues, credit cards, high interest loans, etc.. So while they were paying off their old debts with IVA, they were being targetted by these other companies to take out new debts (which they did). By high interest loans I mean high interest. I worked out my friend was paying over 500% apr on one loan he had and if he got behind they offered him a bigger loan to pay off his arrears and have a little extra for himself.

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