History of IVAs
If you find yourself struggling with debt, you can rest assured that this is not a new phenomenon. In fact, the first official Bankruptcy Act was passed in England nearly 500 years ago, in 1542. Up until 1869, being unable to pay your debts could result in being sent to a debtors’ prison – this is what happened to Charles Dickens’ father, inspiring his popular novel, Little Dorrit.
Fortunately, things have changed a lot since the nineteenth century, and the government has realised the best way to deal with personal debt is to give people who are struggling the chance to pay back what they can afford in a manageable way.
When were IVAs introduced?
IVA stands for Individual Voluntary Arrangement. It is an agreement made between you and your creditors that you will pay a set amount towards your debts every month for a fixed length of time. At the end of this period, any remaining debts you have will be written off.
IVAs were first introduced to England and Wales as part of the 1986 Insolvency Act. The debt solution was originally intended to be used by businesses, so that they could continue to trade whilst dealing with their debts. This was hoped to benefit the economy as a whole, since before the introduction of IVAs, these companies would have been faced with the prospect of bankruptcy, and closed down entirely. This happened quite frequently in the 1980s, and resulted in job loss for the company’s employees, as well as a drop in income for the owner. Creditors themselves were also disadvantaged by the system, since they generally made back very little of what they were owed when a company’s assets were sold as part of the bankruptcy process.
IVAs had a number of advantages compared to bankruptcy:
- The company could continue to trade, meaning no jobs were lost, and the goods or services it produced continued to be available
- The company’s unmanageable debts could be written off, allowing them a fresh start
- Creditors could make back most of, if not all of, their money through a long-term repayment scheme
IVAs were very successful in giving struggling businesses another chance to flourish.
When were IVAs given to Individuals?
Given the successful results which businesses achieved by using IVAs, it is unsurprising that the scheme was later taken up by individual consumers. There is no legal difference between the IVAs used by business owners and those used by private individuals, but setting up an IVA as a business-owner is somewhat more complex due to fluctuations in income.
Today, the vast majority of IVAs are entered into by consumers. The use of IVAs by individual consumers was first popularised in the late 1990s, by financial management firms looking for a new way to help people with their debts. As unsecured forms of credit became easier to access during this time, the number of people seeking help with their debts rose, and individual IVAs grew in popularity. There were over 44,300 IVAs taken out in 2006, compared to fewer than 5,000 in 1998.
2008 IVA Protocol
As more and more people began to make use of IVAs, concern grew among consumer groups that the scheme was being pushed too hard, resulting in some customers entering into IVAs when an alternative solution would have been a better fit for them.
In response, the Insolvency Service worked with consumer groups to develop a universal IVA protocol. The protocol ensured that:
- People struggling with debt are encouraged to speak to their creditors to arrange a repayment plan before considering an IVA
- Consumers are asked about their income and expenditure to ensure an IVA is right for them
- Creditors who reject an IVA proposal need to give a specific reason for doing so
Following the code is voluntary, but it was enthusiastically adopted by many creditors and companies offering IVAs. This has made the IVA process much more predictable, and helped to ensure that this debt solution is not miss-sold.
If you think an IVA might be the right solution for you, call Creditfix today for further advice from one of our friendly advisors. They can be reached by calling 0808 2085 198. Alternatively, you can follow this link to find out more about how an IVA could work for you.