IVAs were introduced as part of the Insolvency Act of 1986 as an
alternative to bankruptcy, enabling individuals who were struggling with
unsecured debt payments to reach a legally binding compromise with their
creditors.
Penetration of IVAs has historically been low due to the limited
number of providers, cost to the consumer and perceived complexity. The
Directors believe that this gives the Group an opportunity to build critical
mass and create barriers to entry in a relatively short timescale.
An IVA is a legally binding, court-approved agreement between the individual
and his/her creditors, under which the individual agrees to make fixed
monthly payments, generally over a five-year period. IVAs must be
supervised by an IP and have many advantages for both the debtor and
creditors. The debtor avoids bankruptcy which can be of particular
importance for home owners or those employed in occupations where bankruptcy
would be highly disadvantageous. The IVA conveys a legal obligation on the
creditors to freeze all interest and charges and, subject to adherence of
the terms by the debtor, to write off any outstanding debts after expiration
of the fixed period. An IVA therefore provides both certainty to and reduced
pressure on the individual. From the creditors' side, the attractiveness of
an IVA is the ability to forecast a higher return than in bankruptcy
combined with lower administrative costs compared to traditional debt
collection. This is driven by a legal obligation on the part of the debtor
to make fixed monthly payments, or to introduce other funds, which have been
assessed by Accuma Insolvency Practitioners (AIP), one of the Group's
trading subsidiaries, as being affordable and sustainable. AIP does not
directly charge the debtor a fee for its services; these are received as a
priority from the contributions made by the debtor into the IVA and are
agreed and funded by the creditors.
According to a report published by the University of Wales, commissioned by
The Insolvency Service:
"Unsecured consumer debt has risen at a compound rate of 12-15 per cent each
year since late 1997. This phenomenon is in large part a reflection of
favourable economic factors, national credit policy, social pressures to
demonstrate certain patterns of perceived material influence, and hard
marketing by lending institutions."
The Bank of England's recent Financial Stability Review (December 2004),
noted that unsecured lending had been rising more rapidly than mortgage
lending. In November 2004 consumer debt passed the #1 trillion barrier; #182
billion of which is outstanding on credit and store cards, personal loans
and overdrafts.
According to the Financial Times, the average household now borrows 140 per
cent more than its combined income, up from 90 per cent in 1998 and from 100
per cent at the peak of the last boom in the 1980s. The Bank of England also
believes that "the growth rate of household indebtedness is likely to remain
strong over the next few years" and with 42 per cent of individuals with
unsecured debts experiencing repayment problems the Directors of Accuma
believe that this increasing level of consumer indebtedness creates a strong
opportunity to rapidly increase market share and create barriers to entry in
a relatively short timescale.
Figures are used purely for a guide. Lombard Direct Loans
