When the fortunes of Northern Rock nosedived so spectacularly in 2007, it's fair to say that most people were taken by surprise.

But the shareholders staring at huge losses on their investments are entitled to ask whether the bank's harsh line on individual voluntary arrangements was a deliberate ploy to massage its default figures – making it look a more viable business than it actually was.

Individual voluntary arrangements: widely used

Individual voluntary arrangements – legally binding agreements between people in debt and their creditors where a proportion of the debt is written off – have been a widely used tool for the last two decades. They allow people to get out of debt without the stigma and restrictions imposed by bankruptcy, and allow creditors a way to recover some if not all of the money they are owed (which they may not do with a bankruptcy).

During the years of "cheap credit" – before this summer's credit crunch – banks and credit card companies were generally willing to accept individual voluntary arrangements that paid them as little as 25p in the pound (ie, wrote off 75% of their customer's debts). But not "The Rock".

Tough line on individual voluntary arrangements

It was well known for taking a tough line and refusing individual voluntary arrangements – forcing many people who couldn't afford to repay its loans into bankruptcy and leaving many of its clients with no choice but to have their homes repossessed.

According to The Times, "Northern Rock was well known for handing out the toughest treatment to IVAs in the banking sector, fighting almost every IVA application it received. The bank also had default rates on its mortgages that were better than average." Or, in other words, The Rock's list of bad debtors looked better than it should because it refused to deal with applications for individual voluntary arrangements.

Individual voluntary arrangements to cook the books: the evidence

Ultimately, though, there is no evidence to support this view. The Times conceded, "There has been speculation that Northern Rock's aggressive response to IVAs had unfairly improved its default rates, but analysts believe that this is an unwarranted criticism for a number of reasons."

It also points out, "Having made substantial losses on IVAs, most other banks have now tightened their terms, bringing the rest of the sector in line with Northern Rock. Also, although IVAs are used on mortgage debts, they are more commonly associated with other types of debt, so are unlikely to have had a substantial impact on Northern Rock's mortgage arrears."

Talk to Varden Nuttall about an individual voluntary arrangement.

Varden Nuttall has been established for more than 15 years and is dedicated to helping people in financial difficulty find a debt management solution through an individual voluntary arrangement (IVA). We employ 90 people, including trained and skilled individual voluntary arrangement administrators, we are one of the largest individual voluntary arrangement companies in the UK and handle more than three per cent of all individual voluntary arrangement applications. To find out more about the company, or to make an appointment to talk about putting an individual voluntary arrangement in place, call us today on 0800 031 9802 or fill in our online enquiry form.