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Failure is a success!

12 February, 2019Keith Pond

Avoiding bankruptcy

One of the most innovative parts of the Insolvency Act 1986, relating to individuals, was the introduction of the Individual Voluntary Arrangement (IVA). IVAs are private agreements between debtors and their creditors to compound their debts and avoid bankruptcy. Once 75%, by value, of creditors have agreed to the IVA it becomes binding on all creditors. Slow to start, but championed by a few Insolvency Practitioners (IPs), IVAs have grown in numbers. As private agreements (unlike Bankruptcy) debtors can retain certain assets and introduce third-party assets and income, provided creditors get a better deal than they would in bankruptcy.

IVA gowth

packing-machine

IVAs now total 60,000 a year (and growing fast) – over half of all Individual Insolvencies. Bankruptcies in 2017 numbered just 15,000 being outstripped by Debt Relief Orders (smaller bankruptcies) by about two to one (Insolvency Statistics, 2018).

The beneficiaries of much of the growth in IVAs have been not only the individual consumers who have avoided bankruptcy (and all that this entails) and creditors who get demonstrably better returns than in bankruptcy, but also the licensed IPs. The Insolvency Act 1986 effectively privatised the insolvency process through licensing of IPs. Much growth is also due to the desire for the courts to avoid dealing with small cases and much to the entrepreneurialism of a few IPs using call centres and IT systems to provide a “packaged” product to consumer debtors.

IVA-ChartIVA evolution

And yet, it has not been a smooth evolution for IVAs.

As a brand-new concept, in 1986, the uptake of the IVA was slow. A few champions supervised 10-20 each but most IPs rarely saw even one. This appears to be quite logical. It would take 3 – 5 years to see substantial numbers of IVAs coming to fruition and so more cautious IPs waited until IVAs had been shown to be successful.

By 2004, some entrepreneurial IPs used the internet to reach beyond regional catchment areas by offering “debt advisory” services in what became known as “IVA factories”. This coincided with a rapid increase in IVA numbers. Banks were less prepared for this onslaught (2007 had their attention directed elsewhere) and reacted by vetoing IVAs that did not propose dividends as high as the banks would accept. The commoditised IVA, typically, offered some assets, an income contribution and a review of home equity in the future. Some, it was feared, undervalued assets and offered less income than the debtor could actually afford.


The IVA Protocol

There was a corresponding hiccup in the inexorable march of the IVA that was remedied in 2008 when the BBA brokered the IVA protocol – an agreement, acceptable to banks and other creditors. The protocol ensured that due diligence was applied to all IVAs so that they represented the best offer that the debtor could make, rather than the smallest repayment that they could get away with.

From a high number of “IVA factories” in the period 2004-2010 the market has been rationalised but the growth in IVAs themselves continues. Greater awareness, greater acceptance by major creditors and a trust in the IVA Protocol has achieved what the 1986 Insolvency Act so boldly hoped for – the innocent “casualties of credit” not having to face the penalty of bankruptcy.

References

Insolvency Statistics (2018) available at: https://www.gov.uk/government/collections/insolvency-statistics

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