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Economic issues put pressure on IVAs

Individual Voluntary Arrangements, long held to be a tower of strength, may yet come under pressure, The Debt Advisory Line’s Craig Gedey has said. Over the past decade, IVAs have seen an impressive growth and overtaken individual insolvencies in relative importance. Unfortunately, that may have lulled many into a false sense of security. While it remains uncertain whether the economy is actually recovering or sinking into a depression, those in an IVA may be faced with threatening consequences either way: Problems on the unemployment market could cause them to slide into bankruptcy. And should the economy turn out to be growing too fast, this is almost certain to send interest rates up – which, in turn, could make it impossible to pay back monthly loans as part of the IVA procedure. “People have come to expect IVAs to work wonders“, Gedey said, “They will now have to face the fact that they are no panacea after all.“

Thanks to their relatively uncomplicated procedure, IVAs are frequently described as a trouble-free way out of debt. Rather than defaulting on their debts altogether, participants in an IVA pledge to pay back a substantial part of their credit and to uphold a steady stream of monthly payments – which also means that, at the end of the term, not only is their remaining debt contained within the IVA written off, but they should find it easier to secure credits and a well-paying employment again. On the other hand, if one’s IVA is accepted, this does not by default rule out bankruptcy in the future. Whether or not the scheme is a success depends seminally on the participant’s willingness and ability to uphold his pledges.

This is where the dependency of IVAs on wider economic factors comes in: A sudden hike in interest rates could result in prohibitively high monthly payments, which, in turn, could force households into defaulting on their credits. Aspects like these should always be factored into an IVA application, as it is intended to provide lenders with a realistic overview of a creditor’s financial capacities and his resilience to market shocks. Unfortunately, IVAs aren’t always designed in a way that will allow debtors to see their payment plan through. As a result, IVAs fail, thereby destroying the hopes of debtors and causing substantial damage the overall economy.

To Gedey, the solution to the dilemma lies right at hand: “For one, we believe there should be stricter controls in terms of providing licenses for insolvency practitioners – the better skilled they are, the higher the chances for IVAs succeeding in the long run. And secondly, those who feel their IVA may be in danger should contact a serious and professional debt management agency as soon as possible to find out what steps to take to avoid an individual insolvency at all cost.“