But the soaring number of people taking out IVAs — the market more than doubled to 20,293 over the past two years — has resulted in debt management firms increasingly offering IVA services to wealthier borrowers, who usually have debts of about £60,000.
Bains & Ernst and Gregory Pennington, the two leading debt management companies, have both set up specialist IVA arms. Bains & Ernst set up Blair Endersby in late 2004 and Gregory Pennington set up Freeman Jones in January 2003.
A spokesman for Gregory Pennington admitted to Times Money that the company is a big player in this market Call centre staff at Bains & Ernst and Gregory Pennington decide whether a debtor should be referred for an IVA — the debt management firm receives a fee for every IVA that is arranged.
Gregory Pennington says that a conversation, which lasts between one and two hours, takes place between the customer and a debt adviser, during which a variety of options will be discussed including a remortgage, a debt management plan, bankruptcy or an IVA.
Gregory Pennington says that the number of IVAs it promoted rose by a fifth last year, with 102 debtors entering into schemes in December 2004. The company says that the increase is a result of rising levels of overindebtedness and a growing awareness of IVAs as a solution.
But Gill Hankey, a director at the Bankruptcy Advisory Service, is critical of the process by which debt management companies steer debtors into IVAs, which she describes as an “IVA factory” approach.
She questions whether it is appropriate for call centre staff to give advice about IVAs to people who may not even know what an IVA is before they make the call. Mrs Hankey says: “Debtors are being dealt with by call centre staff who do not have the expertise or experience to advise them properly whether an IVA is the right option. The insolvency practitioner (to which the IVA is referred) is effectively rubber-stamping the IVA proposal made by a person in a call centre.”
Gregory Pennington says that clients are not misadvised and it points out that the rate of IVAs that fail is currently in “single figures”. Bains & Ernst refused to comment.
The Office of Fair Trading (OFT) laid down guidelines of best practice for the debt management industry in 2001.
The guidelines are designed to ensure transparency in the promotion and advertising of debt management plans, which are often taken out by lower-income groups.
However, Ms Hankey says that she increasingly encounters cases of middle-class debtors who have been wrongly advised to enter into an IVA by debt management firms.
Even well-educated people can take the wrong advice when under the intense strain that overindebtedness brings, she says. If you do take out an IVA when it is not the right debt solution for you, the consequences can be severe.
David Mond, chief executive of ClearDebt, a specialist IVA company, says: “Most IVAs have a ‘windfall clause’, which allows banks and credit card companies to claw back any unexpected large sums a debtor receives, up to the full value of the debt owed.
“In one case we recently encountered, a woman would have lost the home that she was about to inherit from her terminally ill parents if she had undertaken an IVA.”
Nick Pearson, national debt co-ordinator of AdviceUK, says that debt management companies are attracted to the high fees that can be generated by offering IVAs.
“Either we start offering IVAs or we will see more cases of vulnerable consumers falling into the hands of companies that are motivated by profit,” he says.
IVAs versus bankruptcy
