Why do a third of all IVAs fail?

Here’s a copy of a press release from the Insolvency Service, lifting the lid on IVA failure rates.

Take a little time to read it…

 

STATISTICS RELEASE:

 

INDIVIDUAL VOLUNTARY ARRANGEMENTS: OUTCOME STATUS OF NEW CASES REGISTERED BETWEEN 1990 AND 2012, ENGLAND AND WALES

 

Statistics showing the outcome status of Individual Voluntary Arrangements (IVAs) registered between 1990 and 2012 in England and Wales are published today (11 December) by the Insolvency Service. These statistics, recording the status as at September 2013, are shown in Figure 1 below and Table 1 at the end of the main Release. 

 

Figure 1. Individual Voluntary Arrangements by year of registration and outcome status as at September 2013, England & Wales

 


 

                                                                                                                                         Number of registrations

 

 


 

Source: Insolvency Service, September 2013.
1
Numbers are exclusive of IVA registrations that are subsequently revoked or suspended (see Note 7).

 

 

The number of new IVAs registered each year has increased substantially over the period covered, from fewer than 10,000 annually up to 2003, to a peak of over 50,000 in 2010. The upward trend in registrations was particularly steep between the years 2004 and 2006, where there was a more than four-fold increase from 10,725 registrations in 2004 to 44,084 in 2006. The numbers dipped in 2007 and again in 2008, then increased to reach a level of 44,000 to 50,000 per year between 2009 and 2012.

 

The trend in IVA registrations during the period from 2004 onwards is broadly in line with the pattern for total individual insolvencies (although bankruptcy orders continued to rise to a peak in 2009, and the introduction of debt relief orders has impacted total numbers from 2009 onwards). The rapid increases in new individual insolvency cases from 2004, in particular, are considered to be related to households taking on higher levels of debt from the early 2000s, as well as more general economic factors. Figure 4 at the end of this release shows trends in each type of individual insolvency since 1990.

 

For IVAs themselves, the rapid increase from 2004 to 2006 coincided with a number of firms setting up as volume providers of IVAs, with attendant advertising of the service on offer.  Commentators have suggested that the subsequent reduction in new registrations for 2007 and 2008 may be related to fewer cases being approved by creditors where the dividend on offer was below a specified level.  In response to concerns raised, the Insolvency Service led the development of a voluntary agreement aimed at encouraging best practice and streamlining the process for straightforward consumer IVAs. This “IVA Protocol” has been in effect since February 2008 and was updated in January 2013 (see Note 2).

 

The number of IVAs registered each year that have failed and resulted in the arrangement being terminated (by September 2013) has broadly followed the trend in overall registrations described above. It should be noted, however, that the final numbers for the most recent years are not yet known, as a large proportion of IVAs are still ongoing (see Note 8).

 

In percentage terms, the trend in IVAs which have failed is shown at Figure 2 below.

 

Figure 2. Percentage of Individual Voluntary Arrangements resulting in termination as at September 2013, by year of registration, England and Wales1

 


 

                                                                                                                  Percentage of registrations terminated

 

 


 

Source: Insolvency Service, September 2013
1
The lighter shaded bars, from 2005 onwards, represent years where the number of IVAs still ongoing exceeds 5% of registrations for that year. The percentage of terminations is expected to increase for the shaded period, particularly for the most recent years, as ongoing IVAs either terminate or complete going forward; therefore trends should be interpreted with caution

 

 

Between the years 1990 and 2002, inclusive, the percentage of IVAs registered each year that eventually resulted in termination remained fairly steady at around 30% (the lowest figure in this period being 28% for 2001 registrations and the highest 33% for 1995 registrations). The percentage of terminations has since followed a generally upward trend from 30% for 2002 to the level for 2007 registrations, which currently stands at 38%. As at September 2013, nearly one third (33%) of IVAs registered in 2007 were still ongoing (Table 1 below), so the percentage of terminations is likely to increase going forward.  It is not possible to make direct comparisons between termination rates for IVAs registered after 2008, and those registered before, as over half of IVAs are still ongoing for more recent registrations.

 

Looking instead at, for instance, the percentage of IVAs that failed within a year of registration, comparisons can be made on a more consistent basis between registration years.

 

The overall percentage of IVAs registered between 2002 and 2006, which eventually resulted in termination, was 36%.  Around 6% of IVAs registered in these years were terminated within one year, 17% within two years. Almost half, therefore, of all eventual terminations took place within the first two years (though many IVAs for 2005 and 2006 are still ongoing).

 

 

 

Figure 3. Percentage of Individual Voluntary Arrangements resulting in termination as at September 2013, by year of registration and time elapsed between registration and termination, England and Wales1

 


 

Percentage of registrations terminated within time period

 

 


 

Source: Insolvency Service, September 2013
1 Data for 2009 and 2010 registrations are not available because of unreliable data (see Note 6).

 

For IVAs registered in 2007, 21% terminated within the first two years, higher than for the 2002-2006 average. For IVAs registered in 2008, the percentage terminating within a year was higher than for 2007 registrations, but the high percentage of IVAs still ongoing as at September 2013, and policy changes since their registration, means that it is still too early to predict whether the overall termination rate will be higher for 2008 registrations than for 2007 registrations.

 

A discontinuity in the data means that data for 2009 and 2010 are unavailable (see Note 6).  For IVAs registered in 2011, around 4% and 11% had terminated within the first one and two years respectively; much lower rates than for 2008 and earlier years. A similar pattern can be seen for IVAs registered in 2012, though data are only available for one year.

 

 

 

Table 1: Individual Voluntary Arrangements by year of registration and outcome status as at September 2013, England & Wales1 2

 


 

 


 

Source: Insolvency Service, September 2013
1
For years where there are still cases ongoing, the percentages of completed and terminated cases will change and trends should, therefore, be interpreted with caution (see Note 8).
2 Registrations in 2013 will be included after the year end.
3 Numbers are exclusive of IVA registrations that are subsequently revoked or suspended (see Note 7).

 

 

Figure 4. Individual insolvencies, 1990 to 2012, England & Wales

 


 

                                                                                                              Number of new cases

 

There are several key points:

  1. More people are going into IVA;
  2. More people are failing to complete their IVA in accordance with its terms, meaning all they’ve done by going into IVA is waste money, time and effort;
  3. The figures for more recent years haven’t really improved even though the graphs suggest they have – there are large number of IVAs in limbo, where the debtor isn’t complying with the IVA terms but the Supervisor isn’t under any obligation to terminate the IVA, at least not yet.  This will come out when we see the next lot of figures from the Insolvency Service.

So why do IVAs fail?

There are a good many reasons:

  1. Most IVAs are for 5 years, a long time, an awful lot can happen in that time family, job and health-wise;
  2. The choice of debt solution was wrong in the first place.  Many people go into IVA because they see it as the honourable thing, not because it’s the best thing for them and their family.  Pride and emotion get in the way of them taking the best solution;
  3. Creditors impose some pretty testing requirements on debtors – an IVA is not an easy option, it’s going to hurt, and for a good while. There’ll be nothing left in the pot to deal with life’s emergencies or vagaries;
  4. People tend to be over-optimistic as to what they can do to get themselves out of their difficulties, it’s a human trait.  They prefer optimistism to realism.
  5. Many will have received bad advice from their chosen debt adviser, after all they could be driven by their own personal financial interest – they’ll often receive a bonus from signing you up

If you’re contemplating an IVA it’s vital that you take advice from a professional who’s going to give you it straight.  Beware ‘IVA salesmen’, they peddle misery.   And once you have taken the right advice, sit with your family and explain exactly why you are following the route you propose and how it compares with all other routes.

Doing that is tough, but vital.

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