IS BRITAIN’S debt timebomb about to explode? Barclaycard’s recent admission that there has been a surge in the number of customers missing credit card repayments has fuelled fears of a consumer credit meltdown.

If your finances are stretched to breaking point, one solution could be an individual voluntary arrangement (IVA), a formal agreement under which a debtor pays off a percentage of his or her debts over a set period. Insolvency experts had expected a sharp fall in the number of people opting for IVAs after relaxation of the UK’s bankruptcy laws but they leapt by 40 per cent last year. Watch daytime TV and you will see why. Advertisements for IVAs compete strongly with debt management and loan consolidation deals. Times Money looks at ten things you need to know about IVAs.

1. Why were IVAs launched?

A product of the Insolvency Act 1986, IVAs are designed as an alternative to bankruptcy for people who have fallen into insolvency and want to negotiate a way to repay debts.

2. Who should apply?

IVAs are typically suitable for those owing between £15,000 and £20,000 who have sizeable assets, such as a property or large savings. If you work in the police or financial services, an IVA may be suitable because bankruptcy could have a severe effect on your career.

3. How does an IVA work?

It is a repayment plan drawn up between the debtor, his or her insolvency practitioner and the banks. Three quarters of lenders have to sign up for the IVA before it can go ahead.

Repayments are based on a borrower’s income and expenditure. Payments go into a trust account, which the insolvency practitioner uses to extract its fees and to pay creditors. An IVA is a legal contract and banks can still force debtors who default into bankruptcy.

4. How much will it cost?

A typical “nominee fee” is between £2,000 and £3,000. The insolvency practitioner also charges a fee to oversee the IVA, usually about £2,000.

5. How long will it last?

An IVA plan typically lasts five years, after which the outstanding balance of a borrower’s debt is written off.

6. Who offers IVAs?

Debt Free Direct administers more than 2,000 IVAs a year. Shaw’s, an IVA firm based in Grantham, Lincolnshire, is the other leading player in the market. It specialises in managing IVAs for public sector workers such as the police. ClearDebt, one of the newest IVA companies, claims to be among the cheapest.

7. Are there rogues out there? Unscrupulous financial ambulance chasers operate at the fringes of the IVA market. A common ploy is to pull in debtors under the guise of offering free debt advice before steering them into costly and inappropriate schemes loaded with upfront charges.

8. If I am deep in debt, is an IVA the best option?

No, only a minority of debtors should consider an IVA. But firms may try to widen the net to draw in new business. Even reputable firms offer IVAs to young people without savings or a property, provided that they have “adequate income”. Debt advisers say that it is very rare for an IVA to be the best option for such people.

9. Is an IVA a painless alternative to bankruptcy?

IVA companies use the stigma of bankruptcy as a selling tactic, but an IVA will still be a severe blemish on your credit reference file. The Insolvency Service also publishes details of people in an IVA on its website at www.insolvency.gov.uk.

10. Look at free alternatives

Free debt management plans can be set up by Payplan and the Consumer Credit Counselling Service. They will organise monthly payments on your behalf and help you to negotiate with banks and credit card companies.

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