Debt firms rapped over payment plans for benefit claimants

People on state benefits with huge debt problems are being put into expensive, and often inappropriate, repayment plans by some of the growing number of firms specialising in insolvency.

One of the biggest debt advice firms, Debt Free Direct, has told Cash that it sees no problem in recommending individual voluntary arrangements (IVAs) to people in receipt of state benefits.

'If they cannot afford to make payments and retain an adequate lifestyle, then we wouldn't put them on an IVA,' said Andrew Redmond, chief executive of Debt Free Direct. 'The processes we go through to determine whether someone can afford to make repayments or not are very rigorous. Of all the people who phone us, only 4 per cent are put on to IVAs. There is no reason that because somebody is on benefits they should be given a more lenient route, but we always give people the option of bankruptcy if they prefer.'

IVAs are the much-touted alternative to bankruptcy, which involves the debtor coming to an agreement with his or her creditors as to how the debt will be paid off. An insolvency practitioner working for an IVA company formulates a mutually acceptable repayment plan with his client's creditors, typically lasting for three to five years, for which the debtor often pays a fee.

However, other debt specialists believe that IVAs are totally unsuitable for people on benefits. Joanne Hankey, director of the Bankruptcy Advisory Service, an independent debt advice service, said: 'If an individual has no assets and is in receipt of state benefit, we believe that an IVA is inappropriate. State benefit is means-tested and only available to those with an income below a certain level. The benefit made available is to provide them with a basic standard of living.'

She said that the number of people seeking help because of failed IVAs has escalated over recent months. 'Since late last year we have become aware of some organisations pushing the benefits of these IVAs when this type of arrangement is not suitable for the debtor. These arrangements are then either rejected by the creditors or, when they are accepted, fall flat on their face within the first three months. This is particularly the case for those on state benefits.'

Once an IVA is proposed, it has to go through the court, but whereas it used to need a judge's approval in the form of an interim order to go ahead, since 2003 it can be filed with no one having read it. 'It has opened up the system to poor advice,' said Mark Sands, director of personal insolvency at KPMG.

Once the IVA has been approved by the creditors, it goes under the control of a supervisor for the duration of the arrangement. Due to the high volume of IVAs now being proposed, creditors typically vote on the arrangement by post. They often take advice on their decision from an accountancy firm such as KPMG.

'If we see any proposal based on benefits, we would see that as a warning sign and advise creditors to check it has been based on best advice,' Sands said. 'We would need to go back and check that the debtor has really understood what they are getting into.'

One couple spoke to Cash about their experience with Debt Free Direct. Katy (not her real name) approached the company after seeing an advert on national television. She is disabled following an industrial accident and her husband, Mike, is her full-time carer.

The couple, who have two children, live in council accommodation and their monthly household income, comprising income support, disability living allowance and carers allowance, plus child benefit, is £1,535.84. They believed that creditors were owed about £22,000 in total.

Debt Free Direct recommended that they propose an IVA requiring them to make monthly contributions of £458 initially, rising to £515 when their state benefit increased. But although the IVA was accepted by their creditors, they were unable even to make the first payment.

'I realised shortly after agreeing to the IVA that we just couldn't afford those repayments,' said Katy. 'You're clutching at straws when you're up to your neck in debt and just take the first available solution. I now realise that we should have declared ourselves bankrupt.' The couple have now done that.

Redmond, of Debt Free Direct, said: 'The couple must have given us an expenditure figure per month of around £1,100 for us to have deemed that they could afford to make repayments of £458 a month - in many cases, people's benefits do more than cover their living expenses.

'To end up on an IVA and not be able to afford their repayments, they must have underestimated this expenditure. We know that some debt charities will not do an IVA on a case that is completely benefits based, but we don't necessarily agree with that.'

The Consumer Credit Counselling Service (CCCS) said that it was almost always unsuitable to put somebody on benefits into an IVA. 'They would need a surplus of at least £200 a month for us to consider that option. This is not likely to be the case for someone on benefits,' said a spokesman.

'Even when the £200-plus rule is met, there are other criteria before we would deem an IVA suitable. The only circumstance in which we would recommend someone on benefits be put on an IVA is if they have assets, for example equity in their home. Sometimes bankruptcy is a preferable route and sometimes a debt management plan - a less formal but ultimately longer arrangement - is a better option.'

For people who are in less dire financial circumstances, the advantage with opting for an IVA over bankruptcy is that it gives debtors a chance to get on top of their finances. It often means the debtor can keep their home and car and will be more likely to be able to gain employment where they want. Bankrupts often run into difficulty remaining in professions such as the police, armed forces and various financial services posts.

'The IVA is an increasingly popular way forward for many people in financial difficulty because it offers them an opportunity to draw a line in the sand and restructure their finances,' said Steve Treharne, head of Personal Insolvency at KPMG. 'In the right circumstances, creditors also prefer this as a way forward, as they see a significantly greater return on their money than they would do from bankruptcy.

'However, to do a successful IVA you need to have either a large asset which can be sold to pay something towards your debts, which is rare, or, more likely, you have to be in a job providing you with a sufficient income flow to give you room to manoeuvre on a monthly basis. Anyone on benefits will not have sufficient spare income to make payments to their creditors and anyone who sets up an IVA on that basis deserves to be shot.'

Figures published by the Department of Trade and Industry show that the number of people who signed up to an IVA rose 117 per cent in the past 12 months, much higher than had been anticipated. Research from KPMG shows that the average debt for those on an IVA is £60,000 and that people as young as 19 are running up debts that are typically three times their annual income.