Lifeline in prospect for debt casualties
A dispute in the debt management industry could help those teetering on the brink of bankruptcy who are willing to work hard to free themselves of debt, according to banks.
There will be a shift in the Individual Voluntary Arrangements (IVA) industry over the next few years towards helping those who can live on a tight budget to escape bankruptcy and a corresponding move away from those in unsalvageable situations who should file for bankruptcy outright.
IVAs are an alternative to bankruptcy in that they allow people with debts to agree a five-year deal of fixed repayments with their creditors, in return for paying less than their original loans. However, banks have been paying IVA providers lower fees for these arrangements recently, as they are eager to clamp down on their bad debts following the recent credit crunch.
A raft of debt management companies suffered a dramatic fall in their share prices earlier this week as a result, after a leading player in the industry said that it could not make enough money from IVAs to remain profitable.
The company, Debtmatters, saw its share price fall 73% on Monday after it announced a profit warning. The shares of several companies followed suit: Accuma and Debts.co.uk fell 23% and 21% respectively.
Some of these providers have lashed out at banks for scuppering a valuable lifeline for those hoping to avoid bankruptcy. But the banks have now hit back by saying the IVA industry has become 'inefficent' and needs to refocus on those customers that have a chance of recovering at least some of their debts.
The director of the British Banking Association, Eric Leenders, has said many inefficient providers will be pushed out of the market, which he pointed out is good news for those struggling to overcome bankruptcy.
These providers will be replaced by competitors that can survive on lower bank fees because they will only take on customers that are willing to work hard to restructure their debt, instead of those who are unwilling to stick to an IVA's five-year budget.
Customers will benefit because more time will be spent advising those that are genuinely willing to work hard to become debt free; providers will benefit from the increased revenue from banks for completed deals.
IVA providers have been criticised in the past for extensive advertising aimed at coaxing people that would often be more suited to filing for bankruptcy into an IVA with promises of reducing their debt by up to 75%. This has allowed some providers to remain in the market by earning fees of up to £7,000 from these cases before eventually passing them on into bankruptcy after the arrangements fail, said Leenders.
He 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 does not have any figures on the most popular IVAs or those that have the least amount of customers who are unable to stick to their IVA budget. However, Leenders recommended the Consumer Credit Counselling Service (CCCS) and Paypal to customers as they are likely to survive the current IVA squeeze.
Another IVA provider, Debt Free Direct, ended Monday down 29%. But it has a significant base of 11,000 IVA customers for which fees have already been paid, which it believes will help it to ride out the IVA crisis. Over the past year it has seen its income move away from upfront fees paid by banks to performance-related bonuses.
Its insolvency director Derek Oakley said this trend is likely to continue. IVA providers fees are made up of a 30% upfront payment from banks at present, with the rest paid through the life of the IVA as debt is gradually recovered.
He said that this is beginning to sift more towards a 20% upfront payment and 80% based on performance.
'We only choose those that have a robust enough financial situation to allow them to ride out their particular situation for five years. People with the right attitude will be able to temper that and we have a vigorous selection process to single those people out and help them along. It works best that way for both parties.'
Individual insolvencies have been on the rise over the past year. There were almost 27,000 insolvencies in England and Wales between April and June this year, an increase of 4.2% on the same period a year ago; this was made up of 16,000 bankruptcies and 11,000 IVAs.
Source: thisismoney.co.uk
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