In 2022, Government statistics showed that increasing numbers of IVAs do not complete. They fail, leaving the borrower back with their debts.
(Statistics in 2023 were complicated by the special measures during COVID that temporarily prevented many IVAs from failing.)
32% of IVAs started in 2016 have failed. And a lot of these 2016 IVAs are still continuing, so the final failure rate will be over a third.
If you are thinking of starting an IVA, you need to know about these IVA failure rates.
How many IVAs fail?
The IVA Outcome Statistics have details about how many IVAs succeed – get to the end and complete properly, with any remaining debt being written off.
It is inevitable that a few IVAs will fail. In a five or six year contract, unexpected things can happen. That isn’t the fault of the IVA firm if at the start of the IVA it looked likely to go well – it’s just life.
But the recent trend is that a lot more IVAs are failing, some in the first few years, and that isn’t good. It should be very unusual for an IVA to fail in the first two years.
This is what the Insolvency Service says:
The [failure] rate of 32% for IVAs registered in 2016 was the highest since 2009. Because 38% of IVAs in 2016 and 60% of IVAs in 2017 remained ongoing as at 31 December 2021, these numbers are likely to increase further.
It also points out that:
Historically, lifetime termination rates have typically been approximately 5-6 percentage points higher than the rate after four years.
So the final failure rates for IVAs started in 2016 and 2017 are very likely to be more than a third.
Termination rates fell during the pandemic because emergency provisions allowed people to have much longer breaks. This has distorted the statistics – it will be longer before these IVAs finish and until then more will be failing now these emergency breaks have ended.
Why have failure rates been increasing?
1) An IVA was never suitable at the start
One reason for the high early failure rates is likely to be that too many people are being sold an IVA that is not the best debt solution for them. They should have had a Debt Relief Order or gone bankrupt instead.
The FCA is trying to tackle the problem of very poor “advice” by some firms but the FCA only regulates a part of this market – the Insolvency Service needs to take more urgent action to control mis-selling.
Stepchange – an IVA provider with a better failure rate than most – has made the following sensible suggestions:
the current review of insolvency practitioner rules (SIP 3.1) must result in a stronger requirement for individuals to have received appropriate advice before being referred.
Monitoring of large providers should also be increased, with efforts to encourage more robust action — including publishing termination rates by firm.
The Insolvency Service could also work with creditors, advice providers and agents to help them identify IVAs which should be flagged as high risk and not be approved.
I think publishing firms’ failure rates is an essential piece of information. Why should customers have to choose blind, without knowing what this is when they decide to apply for an IVA?
2) More low-value IVAs
Another is that there are now a lot more IVAs set up with low monthly payments. These IVAs are much more vulnerable if your hours are cut or your energy bill doubles:
- if you are paying £350 a month, there is room for your monthly payments to be reduced;
- if your payment is only £120, there is little room to cut it much, so your IVA is much more likely to fail.
Inflation is likely to make failure rates worse
The number of low value IVAs is especially concerning in 2022 as inflation heads much higher. This will mean that many – possibly most – current IVAs will be under pressure this year as I suggested in Debt advice in an age of inflation.
I think this requires a radical rethink of IVAs. If someone has been doing their best and the only reason their IVA is in trouble is because their expenses have gone up much more than their wages, then their IVA should not fail. And it should not be extended for more years. Instead their IVA should be completed and the debts in the IVA should be written off.
This is possible at the moment, but it requires creditors to approve it in a vote. That needs to be changed so that it is the automatic option in this situation.
But if you are looking at an IVA at the moment, you can’t assume that this change will happen. You need to look vary hard at what you are being asked to pay a month and how affordable that will be if petrol goes on up and energy prices, set to jump in April 2022 also go up a lot more in October 2022.
How long do IVAs last?
Many IVAs go on for more than the five or six years the original IVA said. This can happen where there has been an agreed payment break. Or when someone hasn’t reported extra income such as overtime.
At the end of 2021, 5% of IVAs started in 2014 and 17% of IVAs started in 2015, had not yet finished.
This is what one Debt Camel reader said:
IVA’s were supposed to be a way of getting debt free, not keeping you in insolvency for as long as they can. After 75 months of paying for this and a further 3 already waiting for news of closure I am sick of the stress of it all.
That is a pretty common reaction. Many people feel their life is just on hold in an IVA, for year after year:
- they will find it impossible to get a mortgage or a remortgage;
- it may be very difficult to get a tenancy if they need to move, unless they have a guarantor;
- the longer their IVA goes on, the older their car, white goods and furniture gets.
Choose a firm with a low IVA failure rate
Your proposed IVA payment may sound affordable, and a lot less than the normal repayments to your debts. That doesn’t mean it will still be affordable in a couple of years time.
The high failure rates show that for too many people their IVA has turned into a disaster. When an IVA fails, you are left back with your debts. Very often most of your IVA payments have gone in fees and not reduced your debts much.
StepChange publishes its rates and they are much lower than average. So talk to StepChange about an IVA – if they don’t think it’s a good idea, it may well be that the advice from a different IVA firm is too optimistic and not in your best interest.
In late 2022, StepChange are proposing a “mass variation” on all their IVAs to give them greater flexibility to reduce payments because of the cost of living crisis. This should help ensure that fewer of their IVAs fail because or petrol, energy, food and rent/mortgage cists going up.