IVAs set to soar

Written by renxue January 09, 2008 16:22

New rules regarding individual voluntary arrangements (IVAs) announced last week, together with the deteriorating economic backdrop, should push personal insolvencies up to record highs next year, according to economic consultants, Capital Economics.

By the think tank's reckoning personal insolvencies have been falling since the end of last year and are now 12% below their peak - to some extent reflecting the fact that fewer people are struggling with their debt after the tightening in unsecured lending criteria that occurred back in 2005.

Meanwhile, IVAs - whereby an agreement is brokered for the borrower to repay a portion of their debt - have fallen rather more sharply than outright bankruptcies - in part due to the recent reluctance of creditors to agree to them. Indeed, creditors have argued that the upfront nature of IVA fees means that IVA providers have little incentive to ensure borrowers comply with the agreements. But where individuals have taken out IVAs there have been concerns that borrowers are being pressed to take them out unnecessarily, when there is still a chance that they can repay their debt in full.

Regulatory and economic environments are set to put renewed upward pressure on insolvencies next year after the British Bankers' Association announced last week that IVA providers and lenders had agreed a set of industry standards for IVAs, to be introduced in February, covering IVA advertising, advice and transparency.

This follows an agreement brokered in July by the Insolvency Exchange, which manages the IVA process for a number of major lenders. IVA providers agreed to lower the level of their fees, as well as shift to a smaller upfront fee. These changes should help to end the stalemate between IVA providers and creditors and lead to a greater proportion of IVAs approved by creditors.

At the same time, the number of insolvencies will be boosted by the recent deterioration in consumers' finances and, most obviously, the rises in interest rates in 2006 and earlier this year, says Capital.

Capital adds however that there can be a long time lag - three years in the early 1990s for example - between interest rates rising and borrowers seeking a solution to their debt problems. This time lag also means that the recent, and any further, cuts in interest rates are unlikely to stem the rise in insolvencies until 2010.

It expects insolvencies to start rising again next year - climbing to 115,000 after remaining close to 2006's level of 107,000. And a bigger rise is likely to be seen in 2009, when the impact of any rise in unemployment resulting from the economic slowdown feeds through. Indeed, the number of insolvencies could well surpass 130,000 in 2009, says Capital.