If you watch television, listen to the radio or are an habitual reader of tabloid newspapers, you have seen or heard the advertisements. Sinking in debt? Write off up to 80 per cent of your debt. Clear your debts in three to five years, they advise.

Individual Voluntary Arrangements, which are what are being promoted, have received heaps of attention in the press. Known as IVAs, these insolvency agreements help people offload their debts and avoid declaring personal bankruptcy.

The publicity is enticing. Britons are saddled with debt. The UK is responsible for one-third of all unsecured consumer debt in western Europe, according to a study published by Datamonitor, the market analyst. Consumer debt, including mortgages, has jumped to £1,200bn. And the popularity of IVAs is soaring as people look to cope with their arrears.

The number of companies offering IVAs has mushroomed and there are now close to 100 operating in the UK. The largest providers range from Aim-listed companies such as Debt FreeDirect, Accuma and Debt Matters to smaller organisations such as Freeman Jones, Blair Endersby and Haines Watts.

In 2002, there were just 5,000 IVAs. This year, the numbers are expected to reach 40,000 and Credit Suisse estimates there could be 100,000 IVAs a year by the end of the decade.

Business is thriving. Shares in listed debt management companies have soared on the Aim market. And the demand for IVAs has reached such epidemic proportions that the Consumer Credit Counselling Service, a debt charity funded solely by creditors, is said to be contemplating offering IVAs to compete with the commercial market. The hope is this would allow the group to avoid the fees charged by third-party companies and return more money to creditors.

Banks have become publicly critical of the IVA companies, which in many cases are receiving as big a fee for their services as creditors are obtaining in repayments.

“We don’t think the fees these IVA companies are charging are appropriate,” says Richard Lindsay, a spokesman for HSBC.

While IVAs do offer a number of advantages if you are facing the prospect of bankruptcy, their marketing has come under attack. Many analysts criticise it as “misleading”.

Debt-ridden people should approach a debt charity such as Citizen’s Advice or their creditors to find ways to set up an informal debt management arrangement before calling one of the big commercial IVA providers, they say. The Consumer Credit Counselling Service and Payplan are two debt charities, which will arrange a repayment plan for free.

“Why would someone pay for an IVA, when they could arrange a debt management plan for free?” asks Beccy Boden Wilks, a spokeswoman for the National Debtline, a charity that helps people manage their debt.

Critics accuse debt management companies of failing to stress the pitfalls of IVAs along with the advantages.

The most flagrant malpractice happens when insolvency practitioners – who are licensed to write IVAs – encourage people who do not receive much income to consider an IVA when declaring personal bankruptcy would be more appropriate. Another is when these companies take their fees in the first year the IVA is in place but only make payments to creditors in later years.

“The danger in that scenario is that if an IVA fails, the insolvency practitioner keeps his fees but the client is back to square one,” says Boden Wilks.

“We have seen a number of cases where IVAs have been proposed and in some cases accepted by the creditors when the financial resources of the clients were quite limited. In some instances, these clients were just receiving social security benefits,” adds Geoffrey Fitchew, chairman of the Insolvency Practices Council, a group set up to investigate the standards of insolvency practitioners.

Standards within the IVA sector are set to improve in the coming months. Watchdog groups such as the Insolvency Practices Council and regulators are teaming up to take steps to ensure insolvency practitioners offer sound advice. The biggest debt companies are set to adopt a new code, which will require them to pledge to give better advice and also make provisions for clients’ funds in case of their own insolvency.

“Debt management companies have agreed to make these standards a priority,” says Nick Sabin, chief executive of the Insolvency Practitioners Association, a regulatory body for the industry.

In most cases, the misselling of IVAs can be blamed on the business models of debt management companies. Insolvency practitioners have much more of an incentive to sell someone an IVA instead of encouraging him or her to declare personal bankruptcy or take part in a debt management plan.

On top of a fee of about £2,000 for writing up the IVA contract on behalf of the debtor, these groups receive a management fee of between £5,000 and £10,000. This is deducted from the assets paid by the debtor for the duration of the IVA – usually five years. Insolvency practitioners would simply receive a flat fee for handling a personal bankruptcy.

In contrast, banks and other creditors that have lent money to debtors find themselves on the bad end of the deal. They receive just 25 to 50 per cent of their money back from IVA providers.

Some banks, such as HSBC, have opted to increase the minimum amount they will accept by way of repayment – known as their “hurdle rate” – to 35 to 45 per cent in the last six months. This represents their response to the excessive amounts they feel debt management companies are skimming off the top of repayments.

“We were in a situation where we were getting 25p in the pound while the IVA factory was also getting 25p for doing 40 minutes worth of work,” says Lindsay. “The reason for the increase in the hurdle rate was that we wanted to ensure the IVA provider was getting a fair proportion of the fee.”

While IVAs do have some downsides for creditors – which want higher hurdle rates on the debt than the ones awarded by insolvency practitioners – analysts say if someone is facing the prospect of bankruptcy, the benefits outweigh the negatives.

“The selling point of an IVA is that it allows you to avoid going into bankruptcy because that would affect your job or your status,” says Boden Wilks. “IVAs tend to be a better option then.”