As consumer debt in the UK hit £1trillion in 2006, a recent report states that creditors had written off £1.4billion of personal debt during the same year. The record amount has been written off after people signed up for Individual Voluntary Arrangements (IVAs).
The report, undertaken by accountancy firm KPMG, also stated that 2006 had seen the number of people becoming insolvent rise above 110,000, while consumer groups have warned that debt levels had risen to ‘dangerous proportions’. Earlier, Government figures showed that the number of personal bankruptcies had declined as more and more consumers signed up for IVAs – a scheme which allows people with high levels of debt to work out a repayment plan with their creditors.
KPMG said that a person entering into an IVA owed on average £52,000, with IVAs proposing to repay 39% of the amount outstanding. Many of the debts are personal loans, credit card balances and other forms of ‘buy now, pay later’ unsecured loans. Much of the money was borrowed to meet expenditure – including lifestyle items such as holidays and cars – rather than to acquire assets or fund a business. The report also estimated that around 3,000 people entered into an IVA with debts in excess of £100,000, while some as young as 21 years of age were carrying debts of more than three times their annual income. A spokesman for the report’s author said: “Too many people have debts that they have no realistic hope of repaying”.
With much of the money being owed to banks, building societies and other financial institutions, the burgeoning debt problem has seen more and more delinquent credit accounts being bought by specialist debt recovery agencies, such as those operated by the Capquest Group . In fact, the Capquest Group currently manages in excess of £1 billion of delinquent debt.
The rise in IVAs has however, been controversial, with critics claiming they are heavily marketed by firms who stand to earn a fee once an arrangement is in place; these are often sold to debtors who would likely find themselves better off making an informal arrangement with creditors or declaring themselves bankrupt. The claim has been refuted by IVA providers, who argue that they have simply reacted to consumer needs.
The Government has stated that it has no plans to strengthen regulation surrounding IVAs, although there have been several steps taken to address concerns surrounding the scheme and to make consumers struggling to manage their debts more aware of the solutions available to them. Consumers who find themselves in financial difficulty are advised to speak to a licensed insolvency practitioner or local Citizens Advice Bureau for help and advice on how best to tackle their situation.