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IVAs have risen by more than 150 per cent in the second quarter of this year, comprising half of all Insolvencies which rose by two-thirds.
Experian's Richard Fiddis believes IVAs are damaging consumers’ financial futures and having a significant and detrimental impact on the UK’s credit industry.
“Impairments are a major issue for the UK financial services industry today, fuelled by the recent unprecedented rise in personal insolvency levels – particularly IVAs,” said Fiddis.
Experian has analysed IVAs in England and Wales and report that there is disproportionate representation among young families with children, living in mid-market terraced and semi-detached properties in Council Tax bands A and B. The M4 corridor appears to be the major hotspot for IVAs, whereas bankruptcies are most prevalent in the South West, in areas of extreme poverty.
There is also a growing trend among women to opt for IVAs. Whereas a few years ago, both bankruptcy and IVAs were dominated by men, they are now much more evenly spread, with women responsible for 46% of IVAs and 44% of personal bankruptcies.
Fidis is concerned about consumers being encouraged into IVAs without fully understanding the long-term consequences. “Our research shows that there are marked differences in the numbers and growth of IVAs and bankruptcies in different parts of the country and we have to ask ourselves why this is.”
Experian report that analysis by MOSAIC shows the ‘Fledgling Nurseries’ category – families with young children – and ‘Middle Rung Families’ – those making their way up the corporate ladder – are both twice as likely to go for an IVA than they are to opt for bankruptcy, the latter particularly because they believe that no-one will find out about an IVA.
They go on to report that bankruptcy is more likely to be chosen by the lowest income groups, where assets are minimal and they have least to lose – for example, because they live in rented accommodation and their income is predominantly derived from welfare benefits. The higher socio-economic groups, such as ‘Symbols of Success’ and ‘Suburban Comfort’ have a much lower incidence of insolvencies overall, as might be expected, and are, in general, more likely to opt for IVAs. Finally Experian suggest that there is evidence to suggest that elderly ‘Golden Empty Nesters’ may opt for IVAs because, in this group, there is still a strong stigma attached to bankruptcy.
“Since the Enterprise Act, the stigma of bankruptcy amongst the general population has greatly diminished,” says Fiddis. “In some respects, this is a good thing, as it encourages risk taking and entrepreneurism. However, bankruptcy is now increasingly being seen as an ‘easy’ way out of debt, particularly among the young, who often don’t consider the longer term consequences – or are misled into believing that there are none.
“These people tend to be the least financially sophisticated and unfortunately often believe an apparently helpful ‘adviser’ who wrongly tells them that an IVA won’t appear on their credit report or make it more difficult to obtain credit in future, that many of their debts will be wiped out and that they don’t have to tell their employer. What they don’t realise is that the IVA will appear on their credit report for six years and that it is just as likely that they will struggle to get credit in the future as if they had opted for bankruptcy.
“While it is easy to point to the Enterprise Act as the main reason for rising insolvencies, there are, perhaps, more direct causes. One of the main factors is the growth of disreputable, fee-charging debt management companies in some parts of the country, who prey on desperate and vulnerable people, giving unregulated advice that often fails to protect the consumer and makes it impossible for lenders to recover their debts."
Whilst the work of organisations such as Citizens Advice, the Consumer Credit Counselling Service, National Debt Line are considered to provide reasonable advice to consumers with financial problems, the 'other' debt advisory companies are on the ascendancy. The amount of advertising, both press and Internet, undertaken by a growing number of firms promoting IVAs has noticeably increased and millions of pounds are now being spent suggesting that an IVA is the easy way out of debt.
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