The Insolvency Service has published its compilation of Individual Voluntary Arrangement (IVA) statistics between 1990 and 2012. The good news is that more IVAs appear to be completing successfully, but it will take another couple of years before we have definite figures.
UPDATE – I’ve written a new article on the 2015 Insolvency Service figures: How long do IVAs last? How many fail? It’s interesting reading…
Causes of IVA failures
An IVA is a formal long-term agreement between a debtor and their creditors. It usually lasts 5 years or 6 years. With any long-term agreement, things can go wrong – health or employment issues typically – which may mean the debtor can no longer keep up the payments. Temporary problems can usually be overcome by extending the IVA arrangement for a few months, but more permanent difficulties will often result in the IVA failing.
A debtor whose IVA fails is often left with a situation where bankruptcy is the only sensible option and where, with hindsight, it would have been better to go bankrupt at the start rather than waste years in an IVA with the additional stress of trying to prevent it failing.
Dire record before 2008
From 2001 to 2007 there had been a steady increase each year in the percentage of IVAs taken out that year that failed from just under 30% to over 35% as the following graph shows:
This was a very poor record. Whilst some drop out rate is inevitable for such long-term contracts, for more than 1 in 3 IVAs to fail to complete suggested that too many unsuitable people were starting IVAs. The Insolvency Service commented that the 2004-6 coincided with an increase in the advertising of IVAs and of the numbers of agreements being entered into.
What changed around 2008-9?
In 2008 the Credit Crunch ended the upward trend of IVA numbers. The introduction of the IVA Protocol in 2008 resulted in a standard set of IVA terms for the majority of borrowers with normal consumer debts. In 2009 Debt Relief Orders were brought in – though few people who now qualify for a DRO would have had IVAs accepted, these few would have been on the “very marginal” end of the spectrum and so most likely to fail.
It can’t be proved which of these three factors was the most important, but the end result seems to be that IVA failure rates have fallen significantly. Not as precipitously as the above graph might appear at first to show though. The graph shows what percentage of IVAs taken out in a year have failed, so for the most recent years, coloured orange, most of the IVAs are still running – they have neither failed nor successfully completed, so we won’t know yet what the final default rates for 2011-2012 will be until 2016-8
Comparing the failure rates in detail
The above graph shows how many IVAs for each registration year have failed during each quarter after they were taken out. 2011 has a significantly lower failure rate than pre 2008 years for the first two years and 2012 appears to be on the same track as 2011.
There doesn’t seem to be any good reason why these recent IVAs should perform better in the first couple of years and worse in the later years than older ones, so it would be expected that the final failure rate for IVAs taken out in the last couple of years might be around 20% – a considerable and welcome improvement in performance by the industry.