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UK banks are stalling IVAs

Despite claims by many of the UK's debt advisers that the period from January to March 2007 is likely to be their busiest ever, a number of listed UK consumer debt advisers have recently seen as much a one-third of their share value wiped -off following growing concerns that UK banks are now adopting a blocking approach to Individual Voluntary Arrangements (IVAs) that they’re not completely happy with.

IVAs, seen as a less drastic alternative to personal bankruptcy, have recently been dubbed the "bankruptcy lite" option for Brits as they often enable borrowers to write-off part of their debt in return for agreeing to a 5-year (or less) debt repayment plan with their creditors. However, in order for a borrower to successfully negotiate an IVA, one requirement they must meet is that 75% of their creditors approve the IVA.

Having written off £1.4 billion as a result of IVAs in 2006, and with perceived increased advertising by UK consumer debt advisers which portray that less stigma is involved with IVAs, has meant that a number of UK banks are now refusing to get onboard and approve proposed IVA schemes that they feel do not have the banks’ best interests at heart. The net result of this action by UK banks is that borrowers are unable to muster the creditor approval requirement of 75%, thereby either stalling the process or causing the borrower to have to contemplate alternative courses of action.

Despite demanding betters terms under IVAs in return for their agreeing to approve the plan, a number of industry insiders believe that the alternatives for UK banks to these government backed solutions are even worse. Typically, creditors under an agreed IVA can expect to see a return of between 30% to 45% of the total debt being recovered. While not exceptionally high, this is amount is still typically higher than the amount creditors can expect if the borrower is either required to declare full bankruptcy or if the creditor decides to sell the borrower’s bad debt to a debt collection agency.

In any event, with an estimated two million Brits currently experiencing financial problems following the latest interest rate hike announced by the Bank of England, the issue of whether or not IVAs are here to stay is rather a moot one. Clearly the financial system needs debt work-out programmes such as IVAs. Equally clear, however, is the fact that UK borrowers are going to need to carefully consider the opinions and views of their creditors, even if this is at the cost of how much the consumer debt advisers can earn in fees, if they want to ensure that the IVA is a success.

Richard Smith
31st January 2007


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