This is the second in what is likely to be a series of articles over the poor advice that my fellow insolvency practitioners are giving out.
In my last article – click here to read it – I talked about how owners of small companies that had no, or very few assets, were being talked into paying for liquidations they neither needed nor were obliged to carry out. Today, I’m going to be talking about personal insolvencies, specifically a process called an ‘individual voluntary arrangement’ or IVA.
Take a look on the web and you’ll see numerous references to how easy IVAs are to both get into and live through; how they’re great because they’ll write off most of your unsecured debts; how you’ll protect your home; how they will leave you with money in your pocket every month; how they are somehow better and softer than bankruptcy. It all sounds too good to be true…
And it often is.
You see, what they don’t tell you is that one third of all IVAs fail. This is not anecdotal evidence, it’s hard evidence gathered by the government – click here to see the figures. Look at figure 2.
OK, so one third of IVAs fail. Big deal, that’s not so bad, is it?
Well yes, it is. You see not all IVAs are the same – some are income based, some are ‘one-off’ settlements. Under a ‘one-off’ settlement type of IVA, money from an inheritance, windfall, gift from family or friends, or the sale of assets is paid into the IVA in a lump and then paid out to the unsecured creditors in full and final settlement of their debts. The point is this money is certain – it’s probably already sitting there in a solicitor’s or the Insolvency Practitioner’s bank account held on trust pending the creditors’ agreement to the IVA – the success of the IVA is assured. So if we knock out of the equation the one-off settlement IVAs, the true failure rate for income based IVAs must be higher than a third… let’s be conservative and say it’s 40%-45%.
Do you hear IPs telling people coming to them looking for an income based IVA that the process they are about to go into is about as likely to fail as it is to succeed? No, I don’t. Do they warn people of the impact on them of the IVA failing? If you’re lucky, it’s skated over, after all it’s never going to happen is it? – you have every intention of fulfilling your part of the bargain.
So now we know the IVA has about 50-50 chance of failing as succeeding, but what is the impact of it doing so?
Let’s go back to some basics. Back in 1986, IVAs were invented as a softer alternative to bankruptcy for sole traders, i.e. business owners. They weren’t invented to deal with what they have turned out to be used mainly for – hundreds of thousands of consumers who have unsecured credit card and loan debts they could never pay. So with something like 50,000 a year IVAs being put in place, rather than the handful expected, the insolvency governing bodies got together with the banks and agreed a standard form of IVA for such consumer debtors.
It’s called the ‘IVA Protocol’ – here’s a link to the government’s website linking to its various versions over time – and in a number of ways every version of it is truly horrible. It’s clear the banks had the whip hand in the negotiations as it’s very much written in the banks’ favour.
So what does it say about failure? Well, if you miss just 3 income contributions into the IVA over the 5 year period of the IVA – 5 years is the standard duration – the Insolvency Practitioner can petition for your bankruptcy. It’s at his discretion, you cannot stop him. With many IVAs failing in years 2,3, even 4 or 5 of the IVA, all you’ve done while you’ve been paying into the IVA is throw good money after bad. And what’s worse, the longer you stay in the IVA, the bigger a chance you’re giving a trustee in bankruptcy of taking your home off you! (house prices tend to go up, your mortgage will have either stayed the same or gone down, so after a time you’ve probably got equity you didn’t have previously that the trustee can get his hands on).
I have a good number of other issues with the IVA Protocol, but what really concerns me is that not once have I ever had someone who’s subject to one of these things come to me ever fully understand what they had got themselves into. They simply got sold a story that it was the panacea to all their financial woes. Not once has any Insolvency Practitioner fully explain the ‘what ifs’ satisfactorily so the person fully understood everything they needed to know before taking the plunge. And that’s inexcusable.
I recognise that no one has a crystal ball that tells them what’s going to happen over the 5 year period of an IVA covered by the IVA Protocol … that people tend to be optimistic as to the future and hate taking a pessimistic view of what might happen … that people who are desperate will cling to any lifeline… but there is never any excuse from any insolvency practitioner for not being entirely honest with the facts and open as to the implications of a 50-50 gamble going the wrong way. And that’s why I have a problem with my fellow IP’s advice.