The Rise and potential Fall of the Individual Voluntary Arrangement Market

By: Giles Goodwin

Popularly known as IVAs, Individual Voluntary Arrangement agreements (IVAs) are a hot topic in the City and with the press. This article discusses whether they are a genuine alternative to bankruptcy, discusses the current advertising and promotion regime, talks about the major players in the industry and what the non IVA finance industry, primarily the banks, and regulators are saying about the IVA market.

The Dramatic Increase In the IVA Market

Recently there has been a huge push in the advertisement of IVAs saying things like "Drowning in financial problems? Why not write off up to 80% of your debt and completely clear it in five years?" This type of promotion has certainly enticed many people into taking out an IVA.

The UK currently has its largest ever debt problem and, at the time of writing, the UK is said to account for one third of all unsecured debt in Europe. Including mortgages, consumer debt has jumped to �1.2 trillion and the popularity of IVAs is soaring as people struggle to cope with debt.

The number of organisations dealing in IVAs has soared dramatically and there are now said to be 100 operating in the UK. The largest companies range from AIM listed providers such as Debt Free Direct, Accuma and Debtmatters to smaller organisations such as Freeman Jones, Blair Endersby and Haines Watts. In the year 2002 it is reported that only 5000 IVAs were processed in the UK. Next year, the figure is expected to approach 55,000 and within the next four years Credit Suisse has predicted it will reach 100,000.

In recent times shares in IVA companies have soared on AIM and the demand for IVAs has reached such epidemic proportions the Consumer Credit Counselling Service (CCCS), a charity funded by the finance industry, is said to be contemplating offering IVAs to compete with the commercial industry. The hope is they will cut out the fees paid to third parties and return more money directly to creditors.

The Potential Fall?

The Banks have become publicly critical of IVA companies, which in most cases receive as big amount of money as the actual creditors when the debts are paid off. It is rumoured that the IVA group First Advice delayed their listing on AIM as a direct consequence of the criticism from the Banks. While IVAs do offer a number of advantages if someone is facing the likelihood of bankruptcy the advertisements for them have been criticised for being misleading.

With the attractive marketing and advertisements people get enticed into dealing with the IVA companies, whereas they should first seek independent free advice from one of the charities like the Citizens Advice Bureau (CAB), Payplan or the CCCS. They will all arrange a repayment plan and help consumers deal with their creditors for free.

Industry Critics have accused the IVA market of failing to tell consumers about the pitfalls of IVAs and of only concentrating on the advantages. The most flagrant malpractice is when insolvency practitioners (who are licensed to deal in IVAs) encourage people on very low incomes to consider an IVA when declaring personal bankruptcy would be more appropriate. Another criticism from the Banks is that the IVA company takes most of their fees in the first year leaving the actual people owed money (the creditors) to get there repayments in later years. The problem is that if the IVA plan fails the insolvency practitioner keeps their fee but the client is back to square one still owing the whole amount to the creditors.

There have been reports of IVA being processed and in some cases accepted by the creditors and the client has been in receipt of Welfare benefits and in other cases had a low income and very limited financial resources.

Whilst still in the early stages, watchdog groups and the Insolvency Practitioners Council (IPC) are set to improve the market in the coming months. The biggest companies are set to adopt a new code (some of it voluntary), which will require companies to adopt a code of practice to give consumers more accurate advice and also make provisions for clients' funds in case of their own insolvency.

One of the inherent problems of the IVA market is that the providers have much more financial incentive to sell someone an IVA instead of encouraging them to declare themselves bankrupt 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, the IVA groups receive a fee of between �5,000 and �10,000. This is deducted directly from the assets paid by the debtor for the full duration of the IVA, which is usually around five years. Insolvency practitioners would simple receives a flat fee for handling a bankruptcy. In contrast the creditors, who were owed the money in the first place, receives between 25% and 50% of their money back from the IVA providers. In response to this some banks are increasing the minimum amount by way of repayment. One bank recently increased its acceptable percentage from thirty five to forty five per cent.

While IVAs do have some downsides for Creditors analysts say if someone is facing bankruptcy the benefits can outweigh the negatives. If you find yourself with huge debts you can't cope with it is far far better to go to one of the free debt counselling agents mentioned in the article above.

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