The BBC has reported that people on UK state benefits will no longer be given an option of taking out an IVA to help pay off their debts.
In an IVA or Individual Voluntary Arrangement people negotiate a repayment plan with their creditors with an Insolvency Practitioner acting on their behalf. Up to 75% of their debt is written off and interest on debt is frozen. The advantage of an IVA over bankruptcy is that insolvent individuals have more control of their finances, so that they have a better chance of keeping their family home and car for example.
Some debt charities reported that many people on a low income were struggling to keep up with repayments and were facing bankruptcy as a result. It was claimed that many IVAs were being mis-sold to people who would have been better to seek bankruptcy as a first option.
According to the BBC, the companies representing the creditors are uneasy with the fact that too many of the IVA plans for people on benefits are failing early on.
Debt advice groups have also spoken against selling IVA plans to people on benefits. They point out that if the IVA does fail early on, much of the money paid into the fund we will be swallowed up in administration costs, leaving them no better off in terms of their levels of debt.
Some argue that not all people on benefits should be excluded from taking out an IVA though. People on non means tested benefits sometimes have substantial incomes and could well manage to keep up IVA repayments. People on incapacity benefit or disability living allowance may well be suited to taking out an IVA for example.