The number of people with crippling debts who have entered into controversial official agreements to repay the money has reached an all-time high, new figures reveal.
Individual voluntary arrangements (IVAs) registered in England and Wales totaled 81,199 in 2021, more than double the number in 2015, according to the Insolvency Service.
The figures have led to concern that vulnerable Britons are increasingly being lured into unsuitable legally-binding plans by private debt management companies.
IVAs are court-approved agreements that usually last for five or six years, and involve a monthly repayment agreed by the creditor. Overseen by a specialist adviser, they are seen as an alternative to full-blown bankruptcy for people who have assets to protect and enough spare income to afford the monthly amount.
But it is claimed that they are widely mis-sold, and marketed as an easy fix by companies that earn thousands in commission and fees, despite other solutions often being more suitable.
Last year, the Financial Conduct Authority (FCA) said the market was “broken”, with charities and free debt advice services being “crowded out” by firms that earn up to £ 1,000 in commission for every person they refer to insolvency practitioners.
It said exploitative marketing tactics and “potentially harmful business models” often led to “poor outcomes” for those entering into IVAs, who then faced charges of up to £ 5,000 on top of the money they owed.
The FCA, which regulates debt management companies, has proposed a ban on referral fees for lead generators and plans to publish a policy statement later this year.
But charities and finance experts warned that many more people would be trapped in IVAs amid the mounting cost of living, with adverts from IVA lead generation companies appearing at the top of Google searches for phrases such as “debt help”.
On Friday, the energy price cap was increased by 54%, meaning that millions face sharp rises in their gas and electricity energy bills. The prices of food, petrol, diesel, council tax, water, car tax and other expenses have also increased.
Joe Cox, senior policy officer at anti-debt charity Jubilee Debt Campaign, said intermediaries earn “large commissions by encouraging the mis-selling of IVAs”. He added: “This means people in debt end up paying unnecessary fees for the wrong solution, leaving them stuck in extreme poverty and indebtedness for years.”
Ed McDonagh, public policy advocate at the anti-debt charity StepChange, said it was concerning that the number of IVAs had risen so sharply when other debt solutions, such as bankruptcy and debt relief orders, had not. “We can be fairly sure that, given that IVAs are the only debt solution that’s growing, this is largely down to really aggressive client acquisition practices,” he said.
His charity had seen evidence of “budgets being manipulated” to make it look like an individual could afford an IVA when they could not. Many people who are “falsely sold” IVAs should be on debt relief orders instead, which are for people with less than £ 30,000 of debt, few assets and low spare income, and which write off all debt, he said.
“Many IVAs fail, which is pretty cataclysmic for those people. They find that most of their payments have gone on fees and their debt level has hardly changed, which can send them into a further spiral of debt and the stress, anxiety and depression that come with that, ”McDonagh said.
According to government figures, IVAs accounted for nearly three-quarters of all individual insolvencies in 2021 compared with less than 50% before 2014. About a third of IVAs fail, according to the Insolvency Service.
Charities have raised concerns about the misleading marketing of IVAs by some lead generation companies, whose adverts are often difficult to distinguish from services that offer free, impartial advice.
One advert that appeared last week to those searching online for “debt help” promised to write off 90% of debt, and said it provided “government legislated” solutions. Another said: “Get In Touch. Live A Happy Life. ”
Last year, the Advertising Standards Authority (ASA) banned posts from three Instagram influencers that claimed people in financial trouble could wipe out 85% of their debt. The ASA said the ads for Debt Slayers, a lead generator that refers people to third parties offering IVAs, were “misleading” for failing to highlight the risks. Ashteck Media, trading as Debt Slayers, said at the time that its future adverts would highlight the risks, and that it had stopped using influencers. A spokesperson added on Saturday night that the company had not fully understood how IVAs worked at the time of the ads and that it had now stopped all promotion of them.
In a separate case in December, the watchdog ruled that another company offering an “alternative to bankruptcy” had misled customers by suggesting it was affiliated with the government-endorsed National Debtline.
The FCA said it was “focused on ensuring that the credit market works well for borrowers” and had proposed banning referral fees from insolvency practitioners. A spokesperson said: “Where we have had significant concerns with debt advice firms, we have removed their permission to provide advice, or restrictions have been placed on them.
“We will continue to work closely with the Insolvency Service to address this issue.”