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Debtor blind faith and unrealistic creditors keeping IVA failure rate high

16 July 2010

Individual Voluntary Arrangements (IVAs) Outcome Statistics released today from the Insolvency Service show failure rates remain high.

Overly optimistic debtors and unrealistic demands from some creditors are keeping IVA failure rates high, according to Charles Turner, partner at FRP Advisory LLP, the restructuring, recovery and insolvency specialists.

Commenting on the latest IVA outcome statistics, he said: “The failure rate is settling at around a third of all cases and, worryingly, the figures suggest failures are increasing.”

The statistics show how many IVAs have completed, how many are on-going and how many have been terminated (failed) for the period 1987-2009. An IVA will typically take about 5 years to complete; the data released today shows the trend in IVA outcomes versus 12 months ago.

Charles continues: “The number of failed IVAs is rising, with figures going up by between 1 and 3 percentage points since 2003. While recession and higher unemployment will obviously be having an impact, we’re finding that some creditor expectations can be unrealistic. For example, demanding 50p in the £ for the price of approval, when 30p might be the most that is realistically achievable, given the debtor’s circumstances. This results in IVA schemes that are doomed from the start or don’t get off the ground at all, which clearly helps no one; debtor or creditor alike.”

“This, coupled with some debtors being naïve about what they can afford to pay and agreeing to steep repayment terms, is maintaining a high failure rate. It is noteworthy that nearly one in five IVAs approved in 2008, the vast majority of which will be 5 year schemes, has already failed. ”

According to Charles this doesn’t do anyone any favours, as IVAs are generally a more preferable alternative to bankruptcy for creditors, as well as consumers, offering a much better return than would be achievable from bankruptcy.

He continues: “The recent swingeing increase in fees paid to the State in bankruptcy means that, even in those cases where the Insolvency Service collects income contributions (about 20% of all bankruptcies), the return to creditors in most cases will be negligible. For instance, in a new case with contributions of £9,000, the return to creditors would be only about £3,000. A comparable IVA with the same contributions over 3 years would return nearly double that and, if it runs for 5 years, which is typical for an IVA, then the return to creditors would be more than treble.
“Creditors need to maintain a watchful eye on the terms of IVAs, but be a little less demanding on occasion to avoid increasing the chances of debtors being unable to complete their IVAs successfully. This would help to bring down the high failure rate and avoid costly and less fruitful bankruptcies. Ultimately, this will help return more money to creditors and lower the number of bankruptcies.”

The full IVA Outcome Statistics can be viewed and downloaded from here
http://www.insolvency.gov.uk/otherinformation/statistics/IVAs/ivas.htm

Press contact

Kate Macnamara (07714 222793) or Rebecca Curwin (07740 732884)
Grayling
Kate.macnamara@grayling.com / Rebecca.curwin@grayling.com
Tel: +44 (0) 121 265 2760