“Nobody wants to talk the economy into recession, but we need to consider the possible implications and it is better to plan for the worst and not need the plan than to ignore the storm clouds and be unable to cope”
UK insolvency compliance consultants Compliance On Call today called on the insolvency profession and financial sector to make plans to deal with a potentially massive rise in personal insolvencies by 2010.
In a wide-ranging follow-up to their influential 2006 paper on IVAs, Compliance On Call raised the possibility that personal insolvencies, which have been artificially suppressed in the past year by unusual creditor voting patterns, could balloon to 500,000 a year by 2010 if the economy enters recession and they follow the pattern seen during the last recession in the early 1990s.
Among their suggestions, Compliance On Call recommend that the government and insolvency regulators take action to redress the balance in favour of distressed debtors and facilitate an efficient process to allow access to a fair alternative to bankruptcy that protects the independence of insolvency practitioners (IPs) as highly regulated statutory office holders.
Compliance On Call director Gareth Limb said “Nobody wants to talk the economy into recession, but we need to consider the possible implications and it is better to plan for the worst and not need the plan than to ignore the storm clouds and be unable to cope. In the last year, creditors have gained a much stronger position by using unregulated agents to influence what alternatives an IP can offer to debtors, and the time has come to protect IPs from undue influence so that they can comply with their statutory duty to balance the interests of creditors and debtors.”
Recent estimates of the likely numbers of personal insolvencies in 2008 largely ignore the backlog that has built up since the creditors started to vote against individual voluntary arrangements (IVAs) in larger numbers in late 2006 and fail to take into account the potential shift in attitudes towards repayment of debt that a significant fall in house prices and general economic recession could cause.
Background information:
Compliance On Call was set up in July 2005 to provide insolvency compliance support services to UK Insolvency Practitioners. In October 2006 Compliance On Call issued a paper about IVAs, followed by a draft set of standard terms and protocol that became the basis for proposals now being pursued by the whole industry under the joint leadership of the Insolvency Service and British Bankers’ Association.
There has been a massive growth in consumer debt in the last ten years. Although debtors still show a marked reluctance to enter bankruptcy, many have been excluded from entering the main statutory alternative, an IVA, by a change in voting patterns by financial institutions over the past 14 months. As a result, many have dropped into a financial ‘black hole’ with no hope of repaying their debt, or have entered long-term Debt Management Plans (DMPs) in the hope that the situation will improve and enable them to make revised proposals in future.
DMPs are an arrangement between a debtor and one or more creditors. They have no basis in statute and the terms are entirely flexible, offering no protection to the debtor. Because they do not include an element of debt forgiveness they may continue for many years, but they are preferred by institutional lenders because they can be treated differently in their financial statements.
IVAs are a statutory alternative to bankruptcy. The debtor makes proposals to all of his/her creditors after receiving advice from a qualified and regulated Insolvency Practitioner. If the proposals are approved they are legally binding on creditors and the debtor. Because interest is frozen and the arrangement often includes an element of debt forgiveness, financial institutions generally write down the whole debt on approval of an arrangement, so they have a similar impact on their financial statements to that of bankruptcy.
If anyone would like a copy of the full IVA Debate 2 paper, they should contact Bill Burch or Gareth Limb.
