In the first 6 months of 2015 the IVA numbers fell dramatically. The number of people who started an IVA in Q2 2015 was 36% lower than the same quarter in 2014. If the current trend continues the total IVA numbers in 2015 will be the lowest for 10 years.
- Are IVA numbers falling due to an improving economy?
- The impact of Debt Management Companies
- Will IVA numbers rise again in the future?
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Are IVA numbers falling due to the improving UK economy?
There can be no question that as the economy improves the number of people struggling with debt reduces. There are two reasons for this. The first is quite clear. With increasing wages people are better able to maintain their debt repayments. As wages grow faster than the cost of living people have more money in their pocket and can better afford to pay what they owe.
The second is slightly less obvious. As the economy improves people are feeling more positive about their finances and are therefore more willing to borrow. Hand in hand with this the banking industry is more confident and willing to lend. As a result more people have access to credit and can use this to borrow their way out of a financial problem.
If you are struggling with debt the first option you will consider is trying to reduce your monthly payments by getting a consolidation loan. This may be on an unsecured basis or by re-mortgaging. The end result is that there is less need to use a more formal debt solution and IVA numbers go down.
Debt Companies are converting fewer Debt Management clients to IVAs
Between 2013-14 the economy had already started to improve and the numbers of other debt solutions such as bankruptcy were falling. It is therefore strange that the IVA numbers increased. I previously suggested the reason for this was that since 2012 IVAs have become increasingly easy to start. However I now believe this was not the only factor in play.
In 2013/14 the larger IVA companies recognised that it was increasingly difficult to attract new clients. As such they introduced a strategy of buying Debt Management Plan (DMP) clients from debt management companies. They then focused on converting these from their DMPs to an IVA. This was a very successful strategy. As far as the IVA numbers were concerned they boomed.
This gave the false impression that more people were getting into difficulty with debt and starting an IVA to resolve the problem. In fact all that was happening was more people were simply converting from one debt solution to another. However by the beginning of 2015 this activity had all but stopped. This is largely due to tighter rules introduced by the Financial Conduct Authority (FCA) since April 2014. As a result the IVA numbers in 2015 have now fallen back in line with other debt solutions.
Will IVA numbers start to rise again in the future?
Given the economy continues to improve I feel it unlikely that IVA numbers will rise again in the short term. It is widely believed that interest rates will start to go up in 2016. The cost of mortgages and possibly rents will increase as a result. But this is likely to be in minimal increments and offset by increasing wages. As such I believe it unlikely that a significant number of people will start struggling with debt.
However this does not mean that IVA numbers will not rise again in the longer term. As banks lend more this will lead to more personal debt. As personal debt increases the number of people who get into financial difficulty will also go up. However well the economy is doing some people will always over extend themselves. The number of people who start an IVA will therefore gradually increase once again.
It is also possible that the process of converting of people from Debt Management Plans to IVAs may start up once again. At present all debt management companies are going through the FCA approval process. Some may not achieve FCA approval and will then have to sell their debt management clients. The larger companies who do achieve approval may then have an appetite to buy these with the view to convert them into IVAs where suitable.
If this happens we will again see IVA numbers start to rise. Nevertheless I believe it is unlikely that we will see the IVA numbers return to 2014 levels until the next economic downturn.