Insolvency Figures 2007
Here the DebtWizard comments on why he feels the recently released insolvency figures for 2007 do not give an accurate account of those in financial difficulty.
On the 1st February 2008 the Insolvency Service released statistics for last year's final quarter showing the number of insolvencies for bankruptcies and those entered into an Individual Voluntary Arrangement, (IVA).
I noticed towards the end of 2006 that some lenders, in particular Northern Rock, had started to reject perfectly feasible proposals for no apparent reason. When a bank or lender does this it rings alarm bells and I voiced my concerns to the BBC in February 2007.The rest is history.
Throughout 2007 Northern Rock continued to reject all IVAs and was joined in this by other creditors. Several of these lenders then employed the services of The Insolvency Exchange, (TIX) who are seen by some as an unregulated profit making group employed by creditors to represent them at IVA creditors' meetings.
This group also took a very hard line to IVAs and insisted that IVA providers reduce their fees. Furthermore they restricted the firm's cash flow by insisting the IVA provider take their fees over the whole term of the arrangement, usually 5 years, as against the previously accepted period of a couple of years. If this was not acceptable then TIX would enter a rejection.
The impact of this has been for IVA providers in the UK to withhold putting forward thousands of IVAs knowing that they would be rejected by creditors such as Northern Rock and others who had set too high demands. Debtors were therefore left with two options, either go into a debt management plan for many years with no debt relief or go bankrupt. The banks didn't believe the debtor would do the latter.
Because fewer IVAs were being proposed this also impacted on the major IVA providers, with several firms seeing their share price drop as much as 80% since late 2006.
Consequently the conduct of a select few creditors and their agents has caused considerable stress and anguish to families who have no hope of ever clearing their debt. The British Banking Association (BBA) guidelines state that a debtor should be viewed in a 'positive and sympathetic manner'. For Northern Rock to ignore and banish debtors in trouble is definitely not what I see as 'sympathetic or positive' and to then go cap in hand to the Bank of England and get bailed out within 24 hours is, I feel, both hypocritical and obscene.
Whilst this spat was going on between the lenders, TIX and the IVA providers there was at least some good work going on behind the scenes. A working group was set up in 2004 to look at the way IVAs were advertised and sold to the consumer and how the industry was performing in general. As a result, a standing committee was formed with stakeholders and agreement was reached to implement a new 'Protocol SCIVA' (Standard Consumer Individual Voluntary Arrangement) on the 1st February 2008.
Many would argue that this reform was very much needed and it should hopefully make IVAs more transparent resulting in them being more attractive to debtors, creditors and IVA providers.
The reason I feel that the insolvency figures are not an accurate indication of those going bankrupt or proposing an IVA is simple. Research at the IVA forum on the 29th January 2008 suggests that possibly up to 20,000 individuals were denied the opportunity to propose an IVA during 2007 through the lenders hard line attitude and Northern Rock's blatant refusal of virtually every IVA proposal, irrespective of the dividend in the pound.
In 2005 there were 20,293 IVAs accepted, in 2006 there were 44,332 (an increase of 24,039) and in 2007, 42,166. If 20,000 is added to the number for 2007 then we are getting nearer the real figure of around 62,000 IVA's.
If my research proves to be accurate then debt problems are rapidly escalating and not becoming as stable as certain institutions would have us believe.
This 'Protocol SCIVA' needs to work otherwise the old style IVA may well prove to be difficult to sell to the debtor in the future. Bankruptcy may well takeover as the most realistic solution for an overstretched individual. In a bankruptcy there are no hurdle rates and the repayment to the Official Receiver through an Income Payment Order, (IPA) if deemed appropriate, will only be for 3 years as against hurdle rates and 5 years of payments in an IVA.
Finally one has to remember that by the bank rejecting an IVA and with the debtor either going into debt management or the bank selling on the debt, then this 'bad debt' will not show up on the bank's financial sheet, an insolvency is not recorded thus masking the true problems the bank and the economy may be having.
See the Insolvency Figures since 1960 detailing all insolvencies since records began in 1960, note the huge increase in IVA's between 2004 and 2005 and again the following year, 2006.
Click here for my report of the forum on 29th January 2008 at which I was present.