Monday 9th June, 2008 

A warning has been issued for consumers who have taken out an Individual Voluntary Arrangement (IVA) to be wary of unsolicited letters advising them that bankruptcy was a better alternative.

The OFT said that people were being misled by unsolicited letters which suggest that their IVA was mis-sold and that bankruptcy more be more appropriate for them. The mail shots, the OFT warned, were being targeted at vulnerable consumers with IVAs by companies which have obtained their personal details from the Insolvency Register.

The OFT warned that the content of letters were misleading and had also failed to explain the implications of terminating an IVA and going bankrupt.

An IVA is a formal agreement where the interest is frozen and a set amount of money is repaid and in most cases some of the debt is written off. The duration of an IVA is generally over 5 years. Where an IVA offers some protection over the home a bankruptcy will invariable mean the sale of the assets, including the home. In addition further restrictions can be placed on a bankrupt which could have implications on obtaining credit and carrying on a business.

The OFT were concerned that the letters failed to explain that during an IVA the money initially paid would be going towards the fees of setting up the IVA and not towards reducing the debt. The consequence of which is that should an IVA agreement terminate early it may be the case that none of the debt has been reduced.

Concerned about this, the OFT has issued warnings to 12 companies, giving them 4 weeks to respond. The warning demands that their misleading claims in letters and promotional material are amended, to be more transparent about the potential implications for the consumer by ending an IVA early. Should the companies ignore the warnings they could end up losing their consumer credit licence and have a hefty fine of up to £50,000 imposed.