What debts can I include in an “IVA” or Individual Voluntary Arrangement?

In order to advise you properly with regard to your debts and the options available to you to get yourself out of debt, your insolvency practitioner or other debt advisor will need information about all your creditors.

Your creditors may include the following:

Secured creditors - such as your mortgage provider or any creditor whose debt is secured on your home and/or any other assets;

Landlords - if you are tenant or rent a workshop, offices etc;

The Crown - typically tax owed to the HM Revenue & Customs;

Unsecured creditors - creditors without any security for their debts, such as credit cards, store cards, personal loans and bank overdrafts (if unsecured), amounts due to utility and phone companies, council tax. If you are in business it would also include most trade creditors;

Finance creditors - those creditors who provide assets on hire purchase or finance leases, for instance motor vehicles;

However, not all the above types of creditor are eligible for inclusion in an IVA proposal.

Which Debts Can Be Included in an IVA?

Normally any unsecured debts can be included within an IVA. The following are examples of unsecured debts normally included as part of an IVA agreement:

• Business loans for which you are personally liable
• Catalogues
• Credit cards
• Outstanding balances after repossession of your home or vehicle
• Bank overdrafts
• Personal loans
• Store cards
• Personal debts due to the HM Revenue & Customs can be included.

Which Debts Can’t Be Included in an IVA?

Some debts cannot be included within an IVA. These include:

• Secured debts, (vehicle hire purchase agreements, mortgage or other loans secured on your property and related arrears)
• Rent and rent arrears
• Fines such as parking offences, speeding tickets
• Magistrates Court fines
• Debts incurred through fraudulent activity
• Child maintenance/Child Support Agency payments

The above will normally have to be paid, but provision for the repayment of these debts will be taken into consideration when calculating your monthly disposable income.

The more information you can provide the insolvency practitioner or debt advisor about your creditors, the better. You should try to provide the following details:

• The name and address of the creditor
• What type of creditor they are (see above) and how the debt was incurred
• Any account or reference numbers
• The amount owed to the creditor and the rate of interest being charged, if any
• The current monthly repayment

Other information required to be able to advise you properly includes:

• Details of any legal action that has or is due to be taken, particularly, if the creditor has obtained a county court judgement or is taking steps to bankrupt you
• Details of any arrears, this is particularly important if the creditor has security or is a landlord or finance creditor

One final point …

It is important that you tell the insolvency practitioner or debt adviser about all relevant debts. Bank overdrafts are commonly overlooked. Although you may be “in the red”, your wages/salary are paid into your bank account and you use it regularly to meet your normal living expenditure, therefore many people don’t think of their overdraft as a debt. If your account is overdrawn, it still represents a debt.

On the approval of your voluntary arrangement, all unsecured debts “crystallise”, freezing the balances at their current levels and preventing further interest and charges being incurred. This means that your bank overdraft will also be frozen and your bank will probably stop you from using this account.

You should remember that an IVA proposal may contain a clause which states that “in the event that any creditor has inadvertently failed to be notified of the Arrangement owing to a honest omission or oversight, then provided the claims of any such creditor or creditors in aggregate, will not reduce the likely dividend to ordinary unsecured creditors by more than 10%, then these claims may be admitted. If such claims exceed 10%, the Supervisor must convene a general meeting of creditors to consider whether the said claims should be admitted”. If the likely dividend to creditors is adversely affected so that it reduces by more than 10% this can potentially lead to the failure of your IVA.

Student debt - practice makes perfect

According to an article in The Telegraph last summer, thousands of students run the risk of bankruptcy each year after accumulating debts whilst at University and as many as 1 in 10 university students could be declared insolvent as a result of borrowing money to pay for increasing tuition fees and living costs.

The Telegraph article quotes the uSwitch.com price comparison website which suggested that students starting university in 2007 are likely to face total debts of up to £3.2 billion, which is three times the figure for 1997 while Push.co.uk, the university guide, claims that freshers inducted during 2007 will owe up to £21,000 by the time they graduate.

More worrying is that previously some graduates have actively sought to declare themselves bankrupt in order to avoid paying back their student debts. This is certainly not an easy option. Once adjudged bankrupt, your credit record will be affected for the next 6 years, you will find it hard to get a mortgage, hire purchase or overdraft agreement, you cannot borrow more than £500 on credit during the course of the bankruptcy without informing the potential lender that you are bankrupt, your bank account will be frozen and your assets may be seized and sold for the benefit of your creditors.

You should note that since 1 September 2004, student loans are now exempt from bankruptcy laws and so they will not be “cleared” if you declare yourself bankrupt. If you were made bankrupt before 1 September 2004 you may still have to repay your student loan. (If already bankrupt, the Official Receiver dealing with your bankruptcy will be able to advise you accordingly).

In 2006, the Liberal Democrat Shadow Chancellor, Vincent Cable MP, expressed his concern at the apparent underestimation of personal debt incurred by university students. The number of young people (those aged between 18 – 29) who have been declared bankrupt has been on the increase since 2001. In 2001-02 there were 21,530 bankruptcies where the debtor's age was recorded and of these 1,681 bankrupts were aged 18 - 29. However, the figures had increased to 34,852 and 6,520 respectively in 2004-05.

Young people appear to be particularly vulnerable to debt, according to Youth Information. While unemployment and low pay are major factors, tempting offers such as 0% finance on goods purchased and discounts offered by storecards play an important role.

The Debt Advice Trust recently reviewed a new Alliance & Leicester account aimed at people aged between 16 – 21 years old and suggests that banks may take advantage of the compulsive nature of young people, who are less likely to read the fine print on the terms and conditions.
Debt is increasingly a problem affecting young people and those starting out in their careers following a university education, although it should be noted that until you reach the age of 18 you are not legally responsible for your debts. It is therefore unlikely that you will be offered credit from banks and other financial institutions until you turn 18.

While credit has its uses it is important to stay in control. North Lanarkshire pupils are receiving advice concerning money management at school through a new debt awareness pack unveiled by North Lanarkshire Council at Dalziel High in Motherwell on 13 December 2007. It is designed to raise young people’s awareness about debt and help them make informed decisions about their finances in both the long and short term.

During a House of Commons debate on 27 February 2008, Sandra Gidley, Liberal Democrat MP, moved “that leave be given to bring in a Bill to require schools to provide education on personal money management; to make provision about advice centres on personal finance; to impose conditions on the activities of money-lending companies; and for connected purposes”. Sandra Gidley is concerned that our increasingly materialistic society is fuelling a growing debt crisis and is even impacting on our children’s behaviour. A survey of 14 – 18 year olds revealed that more than half are in debt by the age of 17 and 26% of those surveyed perceive credit cards and overdrafts as a way of increasing their spending power.

In Sandra Gidley’s view we need to tackle the problem at an early age and introduce budgeting and money management lessons in schools. After all, a school education should be about more than just subject knowledge. It should equip you with the skills to help you make a start in life once your formal education has stopped.

If you need to talk to someone about your debt, many Citizens Advice Bureaux employ debt counsellors or you could contact a free debt help line for advice on the various options to help you manage your debt.

Alternatively, the following sites have some useful information to help you manage your debt:

The Debt Helpline
Isle of Man Government – Golden rules of debt
YouthInformation.com
National Debt Line

Till debt do us part

In January this year, the BBC reported that five million people, which equates to 1 in 10 adults, spend more than they earn each month, according to figures compiled by the financial comparison website uSwitch.com. Overdrafts and credit cards generally provide the funds to enable these individuals to spend beyond their means. The number of credit cards issued has increased to 71 million from 36 million over the past 10 years.

In a separate BBC article, more and more families are relying on 2 or more salaries to make ends meet. In fact, 51% of working families with more than one child feel that they are struggling to cope with increasing household bills and spiralling debt.

In addition to higher mortgage costs and increases in household bills such as council tax and utilities, the uSwitch.com analysis uncovered that spending on non-essential items has risen by 65% over the past decade. Their conclusion is that we are in a “spendemic”.

More worrying than our level of debt is the millions of people feel compelled to hide it from their loved ones. The Sun newspaper, Easier Finance and the Debt Advice Trust have all recently reported that significant numbers of people have secret bank accounts and take on secret debt without confiding in their partners. Apparently 1.35 million British people have secret debts, the total sum of which is approximately £7.7 billion. The reasons for this secret debt vary but may include:

• Clothes, shoes and accessories, (generally women)
• Secret hobbies (typically men)
• Gambling
• To pay off other debt

Debt can seem like the other person in a relationship, driving a wedge between the couple. According to Bankrate.com, debt has the power to wreck a marriage but it is often a silent killer which goes unnoticed by the couple. Frustrations can certainly escalate when the couple is faced with mounting debt and financial hardship. If the couple is forced into taking out a consolidation loan, or entering into a debt management plan or an individual voluntary arrangement, or “IVA”, the more shrewd minded individual of the couple may feel that they are paying for the financial mistakes of their partner.

USwitch.com explains that differences of opinion about spending and saving can put a strain on a relationship and that couples need to reach a consensus about money by discussing their financial situation and trying to reach a compromise. However, many people find that debt is a difficult and embarrassing topic to broach with their loved one, but it is much better to talk about it than let your debts mount up to the point where you need to consider formal insolvency, such as an IVA or bankruptcy.

It may be beneficial to talk to a professional debt advisor, such as The Debt Helpline, who can give free, impartial advice. For advice of a more personal nature, you may wish to contact the Samaritans or Relate.

Finally, you may wish to consider the following measures which may help you regain control of your finances and avoid a formal insolvency:

• Are there family or friends that you could approach for a gift or interest free loan?
• Do you have any savings which could be used to reduce your debts? The interest you receive on savings is often much less than the interest which is charged on a credit card debt so your money could be put to better use by settling some of your debts.
• Could you save money by changing utility suppliers? Organisations such as Which may be able to point you in the right direction.
• If you believe that your financial problems are of a short term nature, you might wish to consider transferring the balances on your credit card(s) to those institutions offering 0% interest on balance transfers for an introductory period - this is not a solution for those with long term financial problems due to the temporary nature of these low or nil rates of interest
• Is it possible to take on some additional part-time work in the evenings or weekends to help pay off your debts? However, you should proceed with caution as working extra hours may affect your health and your relationships with others.
• If more than one member of the household owns a car, is it possible to raise some money by selling one of the cars?
• Are there non-essential items that you can do without, such as satellite television, mobile phones, etc?
• Try focusing on clearing one credit card debt at a time whilst maintaining the minimum payments on the others. Once you have reduced a credit card balance to nil, then you can cut up the card, return it to the issuing financial institution and request that the account be cancelled. Bogof! This is not meant as a term of abuse. When shopping you might want to consider taking advantage of items which are on offers such as “buy one get one free” or “bogof”. It takes a certain amount of resolve not to buy everything that is bogof purely because it is a good offer, but strategic purchasing of items on bogof can save you a lot of money.