When customers get into financial trouble, what do creditors want them to do? The credit business is simply that – a business. Creditors want their customers to adhere to the terms of their credit contract.
Whether the debts are incurred from the use of overdrawn current accounts, loans or credit cards, creditors are happy to make their profits from the servicing of these contracts.
When debtors get into difficulties, creditors have various options available to them. Frequently the initial response is to write to the customer pointing out the default. Such letters may offer some advice as to what the customer should do. An offer of an interview with an account manager or the bank manager may be offered. The creditor may begin to phone the customer. The matter may be referred to the creditor’s own debt collection department or to a third party debt collection agency. The creditor may make a statutory demand for repayment of sums in excess of £750, threatening legal action if the debt is not repaid within three weeks. The legal department of the creditor may write to the customer outlining a range of actions which may be taken.
How the customer addresses the problem may affect how the creditor behaves. The old ‘do nothing’ or the ‘head in the sand’ approach is unlikely to gain much sympathy from the creditor. Creditors much prefer to see customers face up to their financial situation and obtain further advice. Such advice should be based on a thorough review of the debtor’s circumstances and include consideration of the full range of solutions. If the debtor is insolvent, the options outlined would include entering an IVA, petitioning for bankruptcy or entering a debt management plan. As the debtor is insolvent, debt consolidation is not a viable option. Each of the other main options has its own pros and cons.
From a creditors’ point of view the least attractive option in terms of recovering some or all of the borrowed funds is bankruptcy, mainly because of the high costs of this process. In most consumer debt bankruptcy cases, creditors get no dividend whatsoever.
An IVA differs substantially from both bankruptcy and debt management. IVAs were born out of creditors’ frustration at the low returns in bankruptcy. The 1986 Insolvency Act introduced IVAs for the first time. With the boom in the availability of credit, particularly through credit cards in the last twenty years, IVAs have become more common for many consumers. They are attractive to debtors who wish to avoid the stigma of bankruptcy and other negative effects of bankruptcy such as losing their home. Debtors also feel that they are repaying as much as they can truly afford to their creditors and the term of the Individual Voluntary Arrangement is generally limited to five years. In IVAs debtors can retain their employment or continue trading.
The IVA is also attractive to creditors – much more attractive than bankruptcy. For a start, they can look forward to receiving an enhanced dividend on the debt within a reasonable period of time. Dividends offered in IVAs depend on the individual circumstances but are always better than the return from bankruptcy. Creditors incur no further debt collection costs either. Effectively the supervisor of the IVA collects the money from the debtor and distributes it evenly among creditors. Creditors can also crystallize their bad debt provision in their balance sheet using the projected dividend from the IVA as a basis.
Bankruptcy is therefore an option of last resort for creditors and to suggest that people are forced into bankruptcy by creditors is untrue. A well constructed IVA offers a win/win solution for creditors and debtors alike.