By: Adrian Hudson
Introduction
Individual Voluntary Arrangements (IVAs) were introduced in 1986 as an alternative to Bankruptcy. Their use has grown rapidly in recent years as household debts have soared and because of wider awareness that they exist.. This article discusses whether they are a genuine alternative to bankruptcy, discusses the advertising and promotion regime and talks about the market players and what the industry and regulators are saying about the IVA market.
An Easier Escape Route from Debt
Recently there has been a huge push in the advertisement of IVAs saying things like "Saddled with debt? Why not write off up to 80% of your debt and completely clear it in three to five years?" These types of advertisement have certainly enticed people. 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. The figure is expected to reach 40,000 this year and within the next four years Credit Suisse has predicted it will reach 100,000. Many organisations dealing in Secured Loans, which are typically aimed at people with financial problems, are now creating new divisions specialising in IVAS. The idea being that if a Customer is unable to get a Secured Loan because they have an extremely poor credit record, they can then be pushed down the route of taking out an IVA.
The shares in the companies listed on AIM have soared in recent times 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.
Finance Market Reaction to IVAs
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.
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 only receive 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.
The banks are also reacting in other ways and two of the main High Street Banks HSBC and HBOS have recently joined an Insolvency exchange service called TIX. This is a central Hub where data is collected from Creditors about applications for an IVA. The TIX software, run by a Group called TDX, analyses various pieces of information and decides whether the IVA application should be accepted.
Industry sources estimate that around 10% of IVAs now approved by lenders ought to have been rejected and with the two large banks signed up it is estimated that 2,400 proposals could be thrown out each year.
The way the exchange basically works is by adhering to the rule that 75% of creditors, by value of debts, have to agree to an IVA, so the more financial institutes sign up to TIX, the more applications will be thrown out.
The banks have been criticising 'rogue' insolvency practitioners for pushing people into IVAs, so that they can claim fees of up to ?7,000. With the rise in the number of people taking out IVAs ultimately reducing the Banks profits, this is probably going to be the first in a long line of industry defences against them.
For the last 20 years Adrian has mixed his knowledge of I.T. and finance and worked on specialist projects primarily for the I.T. sector. Adrian has built a reputation for being an expert on corporate finance and currently works for the secured loans business We Introduce You.
Introduction
Individual Voluntary Arrangements (IVAs) were introduced in 1986 as an alternative to Bankruptcy. Their use has grown rapidly in recent years as household debts have soared and because of wider awareness that they exist.. This article discusses whether they are a genuine alternative to bankruptcy, discusses the advertising and promotion regime and talks about the market players and what the industry and regulators are saying about the IVA market.
An Easier Escape Route from Debt
Recently there has been a huge push in the advertisement of IVAs saying things like "Saddled with debt? Why not write off up to 80% of your debt and completely clear it in three to five years?" These types of advertisement have certainly enticed people. 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. The figure is expected to reach 40,000 this year and within the next four years Credit Suisse has predicted it will reach 100,000. Many organisations dealing in Secured Loans, which are typically aimed at people with financial problems, are now creating new divisions specialising in IVAS. The idea being that if a Customer is unable to get a Secured Loan because they have an extremely poor credit record, they can then be pushed down the route of taking out an IVA.
The shares in the companies listed on AIM have soared in recent times 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.
Finance Market Reaction to IVAs
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.
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 only receive 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.
The banks are also reacting in other ways and two of the main High Street Banks HSBC and HBOS have recently joined an Insolvency exchange service called TIX. This is a central Hub where data is collected from Creditors about applications for an IVA. The TIX software, run by a Group called TDX, analyses various pieces of information and decides whether the IVA application should be accepted.
Industry sources estimate that around 10% of IVAs now approved by lenders ought to have been rejected and with the two large banks signed up it is estimated that 2,400 proposals could be thrown out each year.
The way the exchange basically works is by adhering to the rule that 75% of creditors, by value of debts, have to agree to an IVA, so the more financial institutes sign up to TIX, the more applications will be thrown out.
The banks have been criticising 'rogue' insolvency practitioners for pushing people into IVAs, so that they can claim fees of up to ?7,000. With the rise in the number of people taking out IVAs ultimately reducing the Banks profits, this is probably going to be the first in a long line of industry defences against them.
Article Source: http://www.articlerich.com
For the last 20 years Adrian has mixed his knowledge of I.T. and finance and worked on specialist projects primarily for the I.T. sector. Adrian has built a reputation for being an expert on corporate finance and currently works for the secured loans business We Introduce You.
