BEWARE! – What you're not being told could be more important than what you've been told (2)

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.

BEWARE! – What you’re not told could be more important than what you’re being told!

Before I go on, I’ll apologise now, this is going to be a rant!  … about some of my fellow insolvency practitioners…

What is it that has upset me so much?

It’s licensed insolvency practitioners telling people they need work doing by them when they don’t.

Here’s an example, it’s one I see often…

You’ve a small limited company – you’re both director and its sole shareholder – it’s got little or no assets, it’s ceased to trade, but it’s got some debts it can’t hope to pay.  The people it owes money to include a handful of trade suppliers, the government for vat, and a bank.  The debts total £25,000.  You’ve guaranteed the bank, who are owed £5,000, you’re going to have to pay that off.  You’ve already put £10,000 of your money into the company, you can’t afford to put any more money into it, it’s clear the business has nowhere to go, the project simply hasn’t worked.  You’ve lost all you can afford to lose and still you have to pay off the bank.

So you go to see an insolvency practitioner.  He advises you that the company should go into liquidation, a process called a ‘Creditors’ Voluntary Liquidation’ because it’s the cheapest and simplest way to shut the company down. He tells you it’s your duty as a director, or shareholder, to close the company down in this way. And because it has no assets you’ll have to pay for the process, it’ll cost £5,000 thank you.  You pay some money up front, he’ll accept the rest over time, you’ve signed a personal guarantee.

The problem is what he has told you is rubbish… pure and unadulterated rubbish…in fact it’s worse than that, it’s downright negligent advice.

You see, there’s nothing in the law to say that you, either as a director or shareholder, have to put the company into liquidation, nor that you have to fund that liquidation.  The reality is that as a director, your obligation is to ensure the creditors’ position does not get any worse.  And you can achieve that most times simply by stopping trading.  As a shareholder, you have no obligation whatsoever, the duties that exist lie with the directors not you as a shareholder – look at it this way, you’ve got shares in Barclays, what obligation does that give you for either the way its run or for putting it into liquidation should it ever become insolvent? – that’s right, none – and the same principles apply to small limited companies as listed ones.

So why did you just throw good money after bad paying for an insolvency process you have no obligation of paying for?  Especially when (1) you’ve probably also lost your only source of income; (2) You have a string of other personal and personally guaranteed company debts you are struggling paying; and (3) You’re trying to set up a new business to earn some dosh?

Do you know what I do under these circumstances?… that still enables you to comply with your duties as a director?  … that costs just £10 plus the cost of a stamp to write to each of your creditors?

Well, I give you – free of charge – a copy of what I call my ‘no assets letter’ – a letter that you send to the company’s creditors, telling them the company has ceased trading, explaining the company’s financial position, inviting them to put the company into an alternative process called a compulsory liquidation and advising that unless they do so within the next three months, you’ll apply to have the company struck off.

The point is a compulsory liquidation is a process that is started at the creditors’ cost and continued at the government’s cost It costs you nothing.

And in 3 months time if creditors haven’t started off that process, you simply fill in the appropriate Companies House form (DS01 – here’s a link to it) and send it, together with a cheque for just £10 to the Registrar of Companies, who should then strike the company off.  You’ve saved yourself £5,000…and you have still complied with your duties as a director.

And that’s why I say that sometimes the most important things are those which you’re not told…

The question you need to ask is why this is happening?  Sometimes it’s ignorance – the IP or his staff are simply incompetent – yes there are a lot of incompetent insolvency practitioners and their staff out there!  But as I am seeing this happen more and more as sales volumes in the insolvency profession come under pressure, I think it’s down to far more than mere ignorance.  It’s fee hungry insolvency practitioners compromisiong the quality of the advice they give purposely to earn themselves a fee.  And that is a country mile away from providing their clients with best advice.  What makes it worse is that their clients are paying for such poor advice, even though in many instances they can’t really afford to do so.

In my next blog I’ll talk to you about what those salesmen of Individual Voluntary Arrangements don’t tell you, and give you an opportunity to obtain ‘my little book of bankruptcy’, a book that explodes some of the myths about bankruptcy.

 

BEWARE! – What you're not told could be more important than what you're being told!

Before I go on, I’ll apologise now, this is going to be a rant!  … about some of my fellow insolvency practitioners…

What is it that has upset me so much?

It’s licensed insolvency practitioners telling people they need work doing by them when they don’t.

Here’s an example, it’s one I see often…

You’ve a small limited company – you’re both director and its sole shareholder – it’s got little or no assets, it’s ceased to trade, but it’s got some debts it can’t hope to pay.  The people it owes money to include a handful of trade suppliers, the government for vat, and a bank.  The debts total £25,000.  You’ve guaranteed the bank, who are owed £5,000, you’re going to have to pay that off.  You’ve already put £10,000 of your money into the company, you can’t afford to put any more money into it, it’s clear the business has nowhere to go, the project simply hasn’t worked.  You’ve lost all you can afford to lose and still you have to pay off the bank.

So you go to see an insolvency practitioner.  He advises you that the company should go into liquidation, a process called a ‘Creditors’ Voluntary Liquidation’ because it’s the cheapest and simplest way to shut the company down. He tells you it’s your duty as a director, or shareholder, to close the company down in this way. And because it has no assets you’ll have to pay for the process, it’ll cost £5,000 thank you.  You pay some money up front, he’ll accept the rest over time, you’ve signed a personal guarantee.

The problem is what he has told you is rubbish… pure and unadulterated rubbish…in fact it’s worse than that, it’s downright negligent advice.

You see, there’s nothing in the law to say that you, either as a director or shareholder, have to put the company into liquidation, nor that you have to fund that liquidation.  The reality is that as a director, your obligation is to ensure the creditors’ position does not get any worse.  And you can achieve that most times simply by stopping trading.  As a shareholder, you have no obligation whatsoever, the duties that exist lie with the directors not you as a shareholder – look at it this way, you’ve got shares in Barclays, what obligation does that give you for either the way its run or for putting it into liquidation should it ever become insolvent? – that’s right, none – and the same principles apply to small limited companies as listed ones.

So why did you just throw good money after bad paying for an insolvency process you have no obligation of paying for?  Especially when (1) you’ve probably also lost your only source of income; (2) You have a string of other personal and personally guaranteed company debts you are struggling paying; and (3) You’re trying to set up a new business to earn some dosh?

Do you know what I do under these circumstances?… that still enables you to comply with your duties as a director?  … that costs just £10 plus the cost of a stamp to write to each of your creditors?

Well, I give you – free of charge – a copy of what I call my ‘no assets letter’ – a letter that you send to the company’s creditors, telling them the company has ceased trading, explaining the company’s financial position, inviting them to put the company into an alternative process called a compulsory liquidation and advising that unless they do so within the next three months, you’ll apply to have the company struck off.

The point is a compulsory liquidation is a process that is started at the creditors’ cost and continued at the government’s cost It costs you nothing.

And in 3 months time if creditors haven’t started off that process, you simply fill in the appropriate Companies House form (DS01 – here’s a link to it) and send it, together with a cheque for just £10 to the Registrar of Companies, who should then strike the company off.  You’ve saved yourself £5,000…and you have still complied with your duties as a director.

And that’s why I say that sometimes the most important things are those which you’re not told…

The question you need to ask is why this is happening?  Sometimes it’s ignorance – the IP or his staff are simply incompetent – yes there are a lot of incompetent insolvency practitioners and their staff out there!  But as I am seeing this happen more and more as sales volumes in the insolvency profession come under pressure, I think it’s down to far more than mere ignorance.  It’s fee hungry insolvency practitioners compromisiong the quality of the advice they give purposely to earn themselves a fee.  And that is a country mile away from providing their clients with best advice.  What makes it worse is that their clients are paying for such poor advice, even though in many instances they can’t really afford to do so.

In my next blog I’ll talk to you about what those salesmen of Individual Voluntary Arrangements don’t tell you, and give you an opportunity to obtain ‘my little book of bankruptcy’, a book that explodes some of the myths about bankruptcy.

 

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.

New eBook on bankruptcy!

I’ve written a new eBook on Bankruptcy.  You’ll find it very helpful indeed.

It’s called ‘The little book of Bankruptcy’.

I’ve called it that because it’s very short and very focussed, it’s just 5 pages!

It tells you why bankruptcy is the best solution for 99 people out of a 100 by setting out 9 clear advantages of bankruptcy over other potential debt solutions.

It compares bankruptcy with IVAs and Debt Management Plans.

It explains why you should only go into an IVA or DMPs if in doing so you are protecting assets or income.  It shows how bankruptcy does the same in three quarters of cases – yes, in 3 out of every 4 bankruptcies, the bankrupt loses nothing except his/her unsecured debts.

It explodes some commonly held myths about bankruptcy – myths that often hold people back from doing the right thing, the thing that best protects their family.

And I do this in just 5 pages… in an easy to read format.

And what’s more, the book is free, I make no charge for it.

To get a copy just e-mail me – copy my email address into your email programme, with the title ‘please send me your little book of bankruptcy, free of charge’ – paul@midlandsbusinessrecovery.co.uk

Thanks for reading.

Paul Brindley

Licensed to act as an Insolvency Practitioner in the UK by the Institute of Chartered Accountants in England & Wales