Sam Dunn: Rise and fall of the personal debt market

IVAs more than doubled between 2005 and 2006
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The Independent Online

Its name may be short but its impact on indebted Britain looms large.

Once overshadowed by the dreaded bankruptcy, the IVA (individual voluntary arrangement) has, over the past few months, emerged into the spotlight.

In contrast to bankruptcy, which wipes out pretty much all personal debt save student loans, those entering an IVA pay back only a portion of their overall debt. This is usually around 40 per cent but, in some cases, can be much more. After three to five years, the debts are written off, although the individual's credit record will be stained for six years.

Figures released on Friday by the Government's Insolvency Service revealed that, as expected, the number of personal insolvencies in England and Wales topped 100,000 in 2006, totalling 107,288, a rise of 59 per cent on 2005. Of these, 41 per cent were IVAs - compare this with the figures for 2005, when IVAs made up just 30 per cent, and 2004, when they represented only 23 per cent.

The number of people opting for IVAs more than doubled between 2005 and 2006, to 44,331, spooking lenders, which worry about the amount of bad debt being written off.

The rise of the IVA has been attributed to a fierce burst in marketing by debt-relief companies, which are paid fees by the banks for administering debt repayments under the terms of the agreements.

The market wouldn't exist at all if so many consumers weren't wallowing in debt. But debt charities such as Citizens Advice are alarmed by the voracity with which IVAs are being sold.

According to the accountancy firm KPMG, the average sum owed by somebody who applies for an IVA is now £52,000; its own research suggests that about 6 per cent of applicants owed at least £100,000. KPMG describes the pace of growth in IVAs as "breathtaking" and said it expected to see IVAs overtake bankruptcies this year.

However, the brakes may already have been applied. A close look at Insolvency Service figures shows that the annualised rate of growth measured every quarter has slowed dramatically since early last year. Between April and June, the numbers of IVAs were rising by 34.9 per cent; for July to September, they had slowed to 9.8 per cent. In the last three months of 2006, this growth rate dipped again to 3.9 per cent.

The reasons behind this aren't wholly clear. One possibility is that indebted householders are remortgaging to pay off more expensive debts. But rising interest rates will probably put the kibosh on this.

Another possibility is that a stand-off between debt management companies and banks is responsible.

The debt management companies have recently reported that the banks are refusing to approve many IVA offers for fear that the payment plan may not be the right option for the customers (75 per cent of creditors must agree to an IVA for it to go ahead). This trend may escalate if banks - which want debt management companies to be regulated to avoid potential mis-selling - take a more aggressive stance.

On the other hand, the IVA market is likely to get a boost from the launch, later this year, of a "not-for-profit" service from the the Consumer Credit Counselling Service, a debt charity. At the moment, it recommends IVAs to only 3 per cent of its clients; but with its own plan up and running, IVA figures should start to swell again.

The proposed "debt relief order" - a cheap, government-backed, debt write-off plan for those with less than £15,000 in assets - is not likely to become a reality until late next year. With innovation that far off, it will be a white-knuckle ride for many in between.

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