Are rising Individual Voluntary Arrangement (‘IVA’) numbers a cause for concern?
At the start of 2015, bankruptcies fell to their lowest level in 25 years. IVAs now dominate the personal insolvency arena. This could be a sign of economic optimism, but is there trouble ahead?
Over the past ten years the number of individuals declared insolvent in England and Wales has steadily declined, but the ratio of bankruptcies to IVAs has rarely varied. The first notable change in statistics was in 2009, when the number of bankruptcies fell due to the introduction of Debt Relief Orders (DROs). Since then, debt management plans – although not statistically recorded – have been the only other new contender in the market.
What the figures say…
The official statistics for the third quarter of 2015 show that of around 19,500 personal insolvencies in England and Wales, IVAs accounted for some 10,000 – an increase of 9.3% from the second quarter. Bankruptcies rose by 2.8% to around 3,800, while DROs fell by 3.5% to around 5,600.
Why are IVA numbers increasing?
The rise in IVAs could be a sign of optimism about a recovering economy. IVAs involve a long-term payment plan and the debtor, together with the majority of their creditors, must see this as a viable alternative to bankruptcy and one that will provide a better return. The debtor’s surplus income can be collected for five years in an IVA, as opposed to three years in a bankruptcy, so perhaps perceptions of a better economic outlook and greater job security play a role. Separately, the recent housing crash, although now in recovery, saw equity in properties stagnate or decline. A property is sometimes the only asset in a bankruptcy, so if the likelihood of a return after sale is minimal, creditors may have navigated towards approving, rather than rejecting, an IVA.
The growth of ‘IVA factories’
There has been a huge influx of companies offering free advice and bankruptcy alternatives, whose primary business model is supervising IVAs. Such enterprises are increasingly being referred to as ‘IVA factories’. Their sometimes aggressive media advertising can present IVAs as an attractive substitute to bankruptcy. As already noted, IVAs allow a debtor to pay back their creditors over an extended period of time without the sale of their assets. Furthermore, any unsettled debts are often written off at the end of the arrangement. These features may appeal to people burdened by debt, but it’s important that they consider all their options.
What does the future hold?
With household debt rising and higher interest rates on the horizon, the proliferation of IVAs could become a concern. Debtors may become unable to afford their monthly contributions if the interest on their borrowings increases. This could lead to a rise in failed IVAs and contribute to increased bankruptcy levels as debtors’ estates are passed to trustees to administer. Phillip Sykes, president of insolvency trade body R3, expressed concern about how well some borrowers would cope with higher interest rates, saying that a “rise, whenever it does come, will be a test for many household finances”. We should all keep a close eye on insolvency statistics over the coming quarters, to see what new trends emerge.