IVA & Debt Consolidation Advice

The number of people filing for insolvency is on the increase – during the first three months of year, 30,000 people filed bankruptcy or entered into an individual voluntary arrangement (IVA). The reasons behind such sharp increases are a different story totally.

In 1998, there were 24,500 insolvency cases filed. Of that number, 5,000 were IVAs, a formal agreement where the debtor negotiates with the creditor to pay back a portion of the amount of debt owed. The remainder of those were bankruptcies, which required the debtor to sell everything including their homes, in order to settle their debts.

The figures remained fairly constant until 2004 when insolvencies suddenly experienced a sharp increase to 46,650—15,000 bankruptcies and almost 11,000 IVAs. They have doubled again since then with 107,000 insolvencies in 2006 of which 44,000 were IVAs. During the first quarter of 2007, 16,842 bankruptcies and 13,323 IVAs were filed making a total of 30,075 insolvency filings.

According to James Ketchell of Consumer Credit Counselling Service (CCCS), this sharp increase in filings is the result of the IVA factories that began to appear in 2004. Ketchell uses the term "IVA factories" to denote the influx of friendly-face companies that began operations in order to take advantage of the consumer-credit boom in the UK. Through the use of extensive television advertising, they target people with more than £15,000 of unsecured debt (credit cards and personal loans), and offer them an opportunity to become "debt free easily."

These companies then negotiate with the lenders, offering deals of 25 pence on the pound, and then charge set up fees of up to £1,500 for suing their services The lender gets a small amount of their money back, and the borrower is relieved of all but about a quarter of their original debt.

Based on that information, it appears that the IVA companies have created the market. They were originally intended for failing entrepreneurs, but now it is mostly individuals who have unsustainable debts that are using them.

In spite of the substantial rise in IVAs in the past two years, Ketchell doesn't see the figures as being indicative of a potential debt crisis. He is confident that consumers are savvy, and indicates that credit card balances have been declining since last year, with the majority of consumers tightening their belts in light of projections of increases in interest rates.

Ketchell also feels that any concerns over a spendthrift generation that will run up huge credit card bills with a "living now" adage are unfounded. Even though the average CCCS client has unsecured debt of £31,000, over half of the cases are because of an unmanageable situation because of a change in circumstances such as divorce, redundancy or illness. He doesn't deny that some overspending on credit cards occurs, but he feels it represents a minority among the range of situations that cause debt problems.

He says the increasing insolvency figures can be blamed on the rapid expansion of the IVA companies, and recent figures show that there is a decline in the growth rate of insolvency filings.

In spite of the post-Christmas boom that traditionally affects the number of insolvencies, a decline of 1.3% was reported during the previous quarter while new IVA filings at least grew at a slower pace.

Currently the IVA market has reached a level of maturation. CCCS expects the figures for insolvency to reach 50,000 by the end of the year and then reach a plateau.

Some people don't agree with Ketchell, however. Howard Archer who is chief economist for Global Insight, a city research firm, says that even making concessions for the emergence of IVAs making it easier for people to file for insolvency doesn't change the fact that a great many people have borrowed to the maximum and are now in a position where they have difficulty managing their debt loads.

The rising number of IVAs has been of concern to the British Bankers Association(BBA) for quite a while. They are not saying that IVAs do not serve a purpose in some cases, but their concerns are with three major areas that have become more troublesome since marketing schemes that promote them as a "get-out-of-debt-free card;" advice that may not be in the best interests of the debtor; and the structure of the costs.

Because IVA companies place all fees at the front end of the contract that means that means none of the payments are applied to the loan until after the first year during a normal five-year agreement. Debtors who later find themselves in a position to pay off their indebtedness early are chocked when they discover that everything they have paid has been applied to IVA charges and nothing to the actual debt.

The BBA is concerned that the some companies are encouraging people to enter into IVAs who would be better off filing complete insolvency and utilizing the more drastic action of filing bankruptcy.

Since the government's decision last year not to regulate the market, the BBA has taken it upon itself to develop a self-regulating set of protocol for the entire IVA industry. They have received positive response from the industry based upon the assurance that it is of benefit to them as well as the debtors. They are anticipating that the new protocol will be in place by summer of this year, with one of the top agreements being that of ceasing misleading advertisements that tend to encourage people to write off debt when it isn't necessary.

Ketchell is in favour of the move, but he also states there must be more responsible actions on both sides. Of course, no matter what kind of protocol is written, the real responsibility for managing debt will remain with the individual.