Clean Slate Article Published

ARE IVA’S THE PANACEA TO DEBT? – the balance between business and compliance

Panic in the current debt market
Is the debt and lending market expanding, or contracting, or consolidating, or falling apart? The state of our personal debt industry has proved to be a source of exaggeration and exacerbation. The Financial Times called it a “crisis” and said that the “Party is over”. Even the Northern Rock began to blame IVA’s, according to R3 the Insolvency Practitioners Association, for their recent surge in bad debts. So what is the truth? What the lenders leave behind do the debt alternatives collect? And why do some introducers see these alternatives as running contrary to their hard-won TCF badges?
The truth is that the debt market (by which I mean IVA’s and Bankruptcies) has been toyed with by Lenders but without any sign of real product commitment beyond one or two closed distribution channels. Until only recently the Lenders have themselves been partly responsible for the stigma attached to these arrangements by underwriting them out of the mortgage market or by failing to understand the ramifications on their security. Combining this with the mass conveyancing market which has sought to avoid technical advice to Lenders and you can see why the debt package has been left to grow unnoticed in spite of the relative freedoms given by the Enterprise Act 2002.
It is interesting that the pressure has increased on the Lenders at nearly the same time that the IVA market has grown markedly. Consumer debt is big business. If only the Lenders were better advised then perhaps we could see a full circle service which really would be TCF?


What exactly IS an IVA?
An Individual Voluntary Arrangement is a contractual arrangement between three parties- the Court, the Debtor and the Creditors (as a group). It is binding upon all and supervised by an Insolvency Practitioner who has a professional obligation to see the arrangement through to its ideal conclusion.
The law sees the IVA as a mechanism for ensuring the greater good is honoured, and if 75% of Creditors agree to the arrangement then it is binding on the whole.
What it doesn’t do is write debts off anomalously- its job is to recover a full dividend and only take partial payments if the greater good would otherwise lose out using other alternatives.

What are the alternatives?
Of course the quickest, and most familiar, solution is debt consolidation by means of a loan or mortgage, but if this is not available then options include debt management plans or bankruptcy. Debt Management Plans, according to the Insolvency Service have shortcomings when compared to the IVA, not least the longevity of the plan and the lack of debt forgiveness.
Bankruptcy is not the beast formally feared. Whilst it remains a serious and occasionally fraught choice, I have seen some incredible regeneration following a well managed bankruptcy- and whilst the family assets (including the home) can be at jeopardy it is often the case that some open, early and shrewd negotiation can free this.
The most important factor in all of these is setting the Debtor back on the road to recovery and every plan must have an exit if the Debtor and Creditors are going to end up satisfied. That is the bonus of the IVA contract. Of course a healthy exit means a returning Client and possibly re-entry into the loan and mortgage market to clear away the last debts and any overpowering mortgage commitments.
Amongst all options it is the IVA which has caught the public and press imagination. And yet the law here has remained unchanged and it has been the practice and commercialism of the debt companies which has driven the market forward.

The Rise and Rise of Debt Companies and Exchanges
There are now a number of AIM listed IVA specialists in the market proving that debt pays. Whilst consumer financial adverts are nothing new the last few years has seen the gradual transfer of the burden from the front-end (loans and remortgages) to the back-end (IVA’s).

Problems in Paradise
And then came the fall. Of the key AIM listers a substantial number suffered massive dips in pricing. They put this down to increasingly difficult negotiating positions adopted by creditor banks that had to write off £1.4 billion in 2006 from IVA’s. However, some are now bucking the trend and re-building their stock. My view is that, just as with sub prime lending, there is re-focusing that needs to be done and much of this is being done by astute consolidation and industry-led compliance regimes. The market has more players in it now then it ever did (500), and the volume of debt is still there and still needs to be managed. The Times estimated the pool of Britons in inescapable financial difficulty at two million. This is a fee driven industry rather than one driven by securitisation so as long as there is income and equity then there will continue to be the IVA or Bankruptcy. The key is proper and professional conduct and this is why the loan and mortgage industry are in such a good position to be involved.

Consolidation and Compliance
So what makes this a popular deal? Well the Government have a vested interest already in the success of the IVA, not least because it moves the management of the debt out of the public (the Insolvency Service) and into the private sectors. Furthermore the Creditors, with subscription to The Debt Exchange for example; and the BBA through the recent IVA forum are developing a real streamlined and efficient process that can be driven for the benefit of all. The SIVA (S for simple) or the FTVA (Fast Track) are useful examples of service development which can only prove helpful in opening up the options available to the Debtor in circumstances where the traditional modus would not fit.

So what does this all mean for brokers?
The concept of TCF implies a whole of market vision and it makes good business sense to consider the valuable IVA option. In establishing links with brokers we, as lawyers, ensure that the broker can give good holistic advice and also has the opportunity to refinance the Debtor as a part of the proposal. In so doing we help to develop a hard-earned loan enquiry into a managed debt service, and give the Debtor the chance to come to the table once more with clean hands.

Further Information

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