Strangling the golden goose

BBC News are reporting a claim from Price Waterhouse Coopers (PwC) that the numbers of people going into IVAs is now falling.

The report is interesting when read alongside the profit warnings issued by major IVA providers at the end of January. It is obviously in the best interests of the IVA providers to put the best possible spin on events so the PwC report comes from the other side of the counter. They act in IVAs for many of the major lenders including banks.

The PwC report may also reflect a blip in the figures rather than a trend but the BBC report says the reason for fewer IVAs seems to be that the total amount of personal debt was stabilising after booming in the first five years of this decade.

But the other reason given is worth quoting in full. It says:

"Another reason for a fall in IVA numbers is that some lenders are adopting a more hostile attitude to the IVA proposals that are made to them on behalf of their indebted customers. IVAs are entirely voluntary and a creditor is not obliged to accept one if it thinks the person can in fact pay more of their debts than is being suggested.

In the past year banks have becoming increasingly irritated by a minority of people trying to push through IVAs who, they believe, would be perfectly capable of paying off more of their debts without such an arrangement.

Government research has shown that typically IVAs involve men in their 40s with debts of between £40,000 and £43,000. In such a case, an IVA usually cuts that debt to about £24,000, which is then repaid over five years.

But of that, about a third can be taken by the IVA company which has arranged the deal, with the lender such as a bank being offered only £16,000. The new hard-nosed attitude by lenders has led some of the new IVA companies, which have sprung up in the past few years, to report a downturn in business recently."

Doesn't this also sound as though someone has been strangling the golden goose by overheating the market for IVAs ? The marketing of IVAs by the debt factories - and particularly the TV ads - often seemed to be creating a demand for IVAs that might not have existed before.

The OFT are belatedly acting on the mis-selling of IVAs but the mis-selling has occurred at both ends of the market and this is not really reflected in the report.

At one end of the market, IVAs have been sold when bankruptcy would be more appropriate and, at the other end, IVAs have been wrongly sold as a debt avoidance tool that is simply another option in a credit card lifestyle.

IVAs are supposed to be a solution to insolvency, not indebtedness. Many of the factories - and the insolvency practitioners hiding behind them - do not seem to apply this test as rigorously as they should.

When mis-selling is mixed with sizeable profits it is no surprise that major lenders now pool their resources and act through agents like PwC to squeeze some of the abuses out of the system but the problem here is that the people who are now beginning to suffer are the genuine cases who have made every effort to make the best possible IVA offer to their creditors.

It seems that both sides are strangling the golden goose.

The IVA factories have been churning the debt market to satisfy their shareholders and, in an attempt to cut out bad practices, some lenders are now voting down the proposals put forward by those same factories and, as a result, lenders may also reach the tipping point where they will start to see a lower return on their bad debts as more debtors are forced into bankruptcy.

This may all be a tactic designed to move the supervision of voluntary arrangements away from the counselling factories towards the less expensive and more thoroughly scrutinised FTVAs supervised by the Official Receiver - but that is probably too fanciful.

One thing is certain. Debtors whose IVAs might have been approved only twelve months ago are seeing them voted down as a crude means of regulating an unregulated market.

IVAs are not a 'Debt Solution'

IVAs are not a 'debt solution' they are a declaration of insolvency - but the IVA touts insist on selling and advertising voluntary arrangements as if they were a form of legalised debt reduction. They appeal to a desperate and often deep-seated wish to shake off the stress of financial problems and to be able to simply walk way.

If only it were that simple.

The majority of people in the UK are in debt. The majority of people could not afford to repay their mortgage if a demand for payment in full dropped through their letterbox tomorrow but they can afford to meet their mortgage repayments when they fall due. That is the test.

A debtor is only insolvent if their liabilities exceed their assets - the 'balance sheet test' - and if they are unable to meet the repayments on their debts when they fall due - the 'cashflow test' .

Failure to make a number of payments may also not be enough to mean that someone is insolvent. There may have been hiccups in payments that lenders have accepted and sensible arrangements have been agreed for payment of arrears.

The problem - and the insolvency - arises when matters have gone past that point and there is little prospect of ever being able to recover the situation. At this point, when the instalments on personal debts are overdue and cannot be paid and when the prospects of an informal arrangement with creditors have past then there are only two choices: an IVA or bankruptcy.

The courts take a passive role in this and problems can arise because the County Courts do not apply any kind of insolvency test. Debtors can be made bankrupt for non-payment of any debt in excess of £750 although they may not actually be insolvent.

Bankruptcy was not intended to be the automatic consequence of unpaid debt. It is supposed to be a consequence of insolvency but the court's scrutiny of the bankruptcy process is often perfunctory and the Official Receiver (OR) is left to sort out the detail.

There is however one saving grace in referral to the OR. If they decide that a post-bankruptcy Fast Track Voluntary Arrangement (FTVA) is a more appropriate solution to the debtor's insolvency then the bankruptcy can be struck out and a FTVA - with the Official Receiver acting as both nominee and supervisor - is a less expensive process than the IVAs provided by the private sector IVA profiteers.

But, welcome as they are, it should also be acknowledged that FTVAs only exist because of failings in the pre-bankruptcy process and the mis-selling of IVAs has become an increasingly aggravating factor in that stressful process.

IVAs are being sold, on the one hand, as if they were a debt avoidance solution and a lifestyle choice rather than a declaration of insolvency and, on the other hand, they are are also being sold to the truly insolvent who should really be declaring themselves bankrupt.

Too many debtors are entering into IVAs which simply result in the payment of excessive fees to the unscrupulous or incompetent insolvency practitioners hiding behind the IVA factories. Creditors can often receive little or nothing.

Debtors are sucked into these inappropriate IVAs because the touts also exploit the fact - all too frequently overlooked - that many of the people struggling with debt are struggling because they are trying to do the right thing. They want to keep up with their repayments and they often carry on fighting to do that long after they should have given up the struggle.

IVAs help assuage the guilt that comes with not being able to pay back money that is owed. Debtors are led to believe that they are least paying 'something' back to their creditors. The sad reality is that they will be disappointed because they have been misled by IVA providers who make blatantly dishonest and misleading claims about the fees they charge.

An ombudsman or an independent regulator with statutory powers is needed now !