Thinking of going insolvent? The banks might block you

IVAs have been aggressively marketed as an alternative to bankruptcy, says James Moore. But this isn't a soft option and now lenders are clamping down

Amid all the doom on the prospects for the economy, recent government figures on personal insolvencies may have come as something of a surprise: a 16.4 per cent fall to 24,846 in the fourth quarter of last year, compared to the same period in 2006.

That drop is due almost entirely to banks getting tough over individual voluntary arrangements.

IVAs offer an alternative to bankruptcy. They involve setting up an agreement with creditors that will see a consumer paying back at least a proportion of their debts over five years.

Although originally intended to be used by sole traders and small firms, over the past couple of years they have been aggressively marketed at consumers by specialist IVA providers, which can make big money out of setting them up – money that is in most cases paid by creditors. It is usually paid upfront too, so the IVA firm is rarely penalised if things go wrong further down the line.

But the banks have argued – with the agreement, to a certain extent, of consumer groups – that many IVAs have been mis-sold. And increasingly, they have refused to allow consumers to enter into them.

"Last year was difficult because there was such a growth in the amount of IVAs, and several banks were concerned there had been mis-selling," says James Jones, head of consumer education at credit ratings company Experian. "There was therefore some resistance and some consumers might have experienced difficulties as a result of what was going on in the background."

Meanwhile, the marketing of IVAs to consumers has drawn criticism from debt charities and consumer groups. They have suggested that the downside is being downplayed or ignored. For a start, an IVA lasts for longer than bankruptcy – five years compared with three – and the payment schedule is not flexible. If your income falls and you cannot meet it, you might find yourself in bankruptcy anyway, wondering whether that would not have been the best option in the first place.

Perhaps seeing the writing on the wall, the IVA industry has now launched a "protocol" aimed at assuaging the banks. The protocol, which is voluntary, aims to ensure that consumers are given proper advice and that the seemingly blanket advertising of IVAs, a feature of daytime TV for the past couple of years, is brought to an end. This last point is particularly important for the banks as they claimed the TV adverts were misleading and en- couraged people who could actually have managed their debt repayments as normal to enter an IVA. In short, IVAs had become a first rather than last resort for those in financial difficulty.

But is the protocol too little, too late? Banks give it a cautious but hardly wholehearted welcome.

"Hopefully this will weed out some of the cowboys. The advice is improving, as well as the advertising," says Eric Leenders, executive director at the British Bankers' Association.

Debt charities, though, wonder whether the get-tough approach of the banks means that those consumers who need to enter into an IVA are being stopped from doing so.

"IVAs are only suitable for some people, but if their numbers are going down, what would worry us is if those who were suitable were being made to suffer because banks are resisting," says a spokeswoman for Citizens Advice.

As for the protocol, Citizens Advice offers only the most muted welcome: "As with all these voluntary agreements, it really depends on how it works in practice."