COMMENT
The Unfortunate Alternative To Bankruptcy

As we all know bankruptcy is on the increase. Indeed, only yesterday the round-the-world yachtswoman, Tracy Edwards, was declared bankrupt, reportedly owing £8 million.

While there isn't such a stigma relating to bankruptcy these days, many people are encouraged to opt for the alternative - the Individual Voluntary Arrangement (IVA). These are effectively glorified Debt Management Plans which are designed to give creditors a better return than they would get if you went bankrupt.

An IVA is where you come to an agreement with your creditors about how to pay off the debts. It's done under the supervision of a licensed Insolvency Practitioner (usually an accountant or lawyer) who sorts it all out for you and, once in place, it has the force of law.

The good thing about an IVA is that it stops your creditors from knocking at your door and it enables you to have a great deal more control over how your assets are dealt with than you would with bankruptcy. The bad thing is that it all costs money to implement. The median cost of an IVA is £6,500 - money that could be better spent on paying creditors.

Although they tend to work for traders, unfortunately, they're not very effective for the consumer and many people who take them on give up and end up going bankrupt anyway. Part of this is because IVAs are routinely modified to take account of rising house prices and so the consumer is often expected part way through the usual five-year run of an IVA to remortgage or sell his home in order to realise any increase in equity.

Research commissioned by the Insolvency Service three years ago revealed that they were over-complicated, unwieldy and, in particular, expensive. They found that out of around 65,000 IVAs started in the period 1987-2002, 37% had been completed, 23% had failed and the remaining 40% were ongoing.

A working party is currently looking at overhauling the system to make IVAs more user-friendly for consumers. But until that happens, anyone thinking about using an IVA should consider it very carefully. The failure rate is disproportionately high for a scheme that is supposed to help people to avoid bankruptcy.

Check out how to tackle your debts yourself.