IVA Companies To Feel Pinch
There is a dispute in the UK debt management industry which could help people on the brink of bankruptcy, if they wish to work hard to get themselves free of debt. The next few years will see a movement away from bankruptcy to Individual Voluntary Arrangements (IVA) with people given the chance to work their way clear of debt by living on a tight budget.
IVAs allow people to agree a five-year deal of repayments to creditors by paying less back than they originally borrowed. However, banks have recently been paying IVA companies smaller fees for such arrangements as they look to stamp out as much bad debt as possible in the current climate of squeezed credit.
As a result, a number of debt management companies saw their share prices tumble, when a leading player in the industry said it could no longer remain profitable by the money from IVAs. The company was Debtmatters; its share price fell by 73% on one day, and shares in Accuma fell by 23%, and in Debts.co.uk by 21%.
IVA providers have hit back at banks for hampering a valuable lifeline for people seeking a way to avoid bankruptcy. The banks retaliated by claiming that the IVA industry had become inefficient and needed to refocus on customers with a real chance of debt recovery. The banks also said that there would be a shake-out of inefficient providers from the market.
Genuine customers, said the banks, would benefit from the extra time spent advising them on how to get debt-free, and providers would benefit by receiving fees from banks for fully completed deals.
There has been some criticism of IVA providers in the past for widespread advertising to persuade people to go into an IVA rather than file for bankruptcy with the temptation of reducing their debt by up to 75 percent. Some have taken the fee, but the customer has eventually gone into bankruptcy anyway.
Director of the British Banking Association, Eric Leenders, said: "IVAs are being provided at different costs, but they are essentially the same product, so the more expensive players will be driven from the market. There is no doubt that the apocalyptic view being expounded by some is down to the fact they can't provide the service at the right price. There is a plethora of providers and some can produce the IVA more efficiently than others. We are now moving to a market where those who recover more debt, get more out of the transaction. The more efficient providers out there will win out and their customers will be the better for it."
The government's Insolvency Service keeps no figures on the most popular IVAs or those with customers who are unable to stick to their IVA budget. Lenders, however, recommended the Consumer Credit Counselling Service (CCCS) and Paypal to customers as they are likely to survive the current IVA squeeze.
Fees for IVA providers in the UK currently consist of a 30% upfront payment from banks, with the rest paid throughout the life of the IVA as debt is gradually recovered. This is beginning to change towards a 20% upfront payment and 80% based on performance.
There has been a rise in individual insolvencies over the past year. Between April and June 2007, there were almost 27,000 insolvencies in England and Wales, an increase of 4.2% on the same period a year ago. There were 16,000 bankruptcies and 11,000 IVAs.
Published on October 10, 2007
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