Hidden debt scandal - how profit-making firms and unsuitable ‘solutions’ leave people in deeper financial trouble

• Advisers at the frontline are sounding the alarm about clients who are in failed or unsuitable IVAs

• Many IVA adverts were found to share harmful practices including making unverifiable claims

People in deep financial trouble are being misled by profit-making firms into unsuitable debt solutions which are often leaving them worse off. This is according to a new report from Citizens Advice.

With the cost-of-living crisis pushing more people into debt, Citizens Advice has found worrying numbers of people in Individual Voluntary Arrangements (IVAs) unable to keep up with repayments - often because of poor pre-IVA advice from providers. 

Citizens Advice found almost three quarters (73%) of people who are or have been in an IVA said they struggled to make repayments, while more than a third (39%) said their IVA has had a negative impact on their debt levels.

Advisers at the frontline are also sounding the alarm as a sector-wide survey of more than 560 debt advisors found that 84% said they have spoken to clients in failed or unsuitable IVAs.

An IVA is a legally-binding plan that writes off debts after 5-6 years of agreed monthly repayments. If people aren't able to keep up with repayments, the IVA will fail, leaving them unable to write-off their debts. Additionally, because IVA firms charge high front-loaded fees, people may find they've paid thousands in fees but very little towards their actual debts.

Selling harmful promises

In its report, Citizens Advice analysed how IVA adverts targeted people in vulnerable situations on social media. 

The charity found many adverts shared harmful practices - appearing to offer impartial advice, failing to mention risks and fees, making unverifiable claims, and using demographic targeting:

• 64% did not explicitly mention IVAs, and those that did often hid it in the small print.

• 17% had 'advice' in the company name, but were not in fact authorised by the Financial Conduct Authority (FCA) to provide debt advice.

• 17% referenced government legislation or regulation, for example referring to an IVA as a ‘government legislation backed debt relief scheme’.

• 11% used names that emulate charities.

Running riot - and unregulated

The market for IVAs has mushroomed in the last ten years and firms are incentivised to bring in as many potential customers as possible in order to generate a profit from fees. Before 2003, there were fewer than 10,000 IVAs annually but in 2022, there were nearly 88,000 IVAs registered in England and Wales. 

But the advice given by the IVA industry isn't held to the same robust standards as mainstream providers by the FCA. 

Citizens Advice wants to see this loophole closed in order to ensure people are advised on the best solution for them. 

The charity is urgently calling on the Treasury to bring pre-IVA advice under FCA regulation to bolster protections for consumers in the IVA market and ensure that anyone going into an IVA will have received debt advice that they can trust is in their best interest.

‘The IVA company chased me for months which really affected my mental health’ - Chantelle’s story

Chantelle was working until a recent accident left her disabled and unable to work. She had previously been managing repayments on a few credit cards and long-term loans totalling £23,000. With her husband now her full-time carer, their sole income is a private pension and benefits. 

To repay her debts, Chantelle sought advice from an insolvency firm who manipulated her income and expenditure to ensure she was accepted for an IVA. She also wasn’t told about other options that could have cleared her debts more quickly. 

Since the IVA began in 2019, she has struggled to pay the high monthly repayments and has only paid off a tiny amount of the front-loaded fees, not her actual debt. Due to an IVA being legally-binding, Chantelle wasn't able to cancel it even though she could no longer afford to make payments. The IVA firm eventually terminated her IVA, but only after her local Citizens Advice intervened. This delay meant she wasn't able to set up a more suitable debt solution.

“My monthly IVA repayments were around £100pm which was a push. But with each year the repayment amount was increasing, but our income was not, so this made repayments unaffordable. 

“Early last year I had to make the decision to stop making repayments as I could not afford them. The IVA company chased me for months which really affected my mental health. I was really stressed by the situation. 

“My debt had not reduced over the years as the money I had paid seems to have only covered the IVA fees.” 

Matthew Upton, Director of Policy at Citizens Advice, said:

“The soaring cost of living is brewing a debt crisis and we’re seeing profit-driven vultures in the IVA industry ready to prey off people, encouraging them into debt solutions which could leave them worse off. 

“IVAs are meant to provide a solution to problem debt. But far too often, people are flooded with inaccurate or misleading advice, leading them to take out an option which pushes them further into debt and much further away from a lasting solution to their problems.

“It’s not an option for the government to sit on the sidelines and allow this to continue. The ball is in their court to take action and bring the pre-advice IVA firms deliver under FCA regulation.”

Notes to editors

1. More information can be found in ‘Set up to fail’, the new report from Citizens Advice which is available on request

2. IVA polling carried out by Yonder Consulting in 2023 with 724 individuals who are currently in an IVA or have been in one in the last 5 years. 

3. Sector-wide survey carried out in 2022 by Citizens Advice, Money Advice Trust, Stepchange Debt Charity, Christians Against Poverty, Institute for Money Advisers, AdviceUK and Community Money Advice with 565 money advisers. 

4. IVAs differ from a Debt Relief Order (DRO) or bankruptcy which instead require upfront fees, often being a barrier for people to access them.

5. Citizens Advice is made up of the national charity Citizens Advice; the network of independent local Citizens Advice charities across England and Wales; the Citizens Advice consumer service; and the Witness Service.

6. Our network of charities offers impartial advice online, over the phone, and in person, for free. 

7. Citizens Advice helped 2.55 million people face to face, over the phone, by email and webchat in 2021-22. And we had 40.6 million visits to our website. For full service statistics see our monthly publication Advice trends.

8. Citizens Advice service staff are supported by more than 18,500 trained volunteers, working at over 2,500 service outlets across England and Wales.

9. Citizens Advice is the largest provider of free, multi-channel debt advice. Providing that help gives Citizens Advice unique insight into the types of debts people struggle with.

10. You can get consumer advice from the Citizens Advice consumer service on 0808 223 1133 or 0808 223 1144 for Welsh language speakers.