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The IVA league

Going bust is booming, says chm:ping joint managing director Rupert Pybus, and aggressive marketing of individual voluntary agreements is one of the main reasons for hundreds of thousands seeking a way out of debt problems

Financial services have not been this Government’s strong suite. Stakeholder pensions, child trust funds and ATM-fine-dispensing were ill-conceived initiatives.

Now at last it has a success. Over 270 people are going bust every day and going bust is booming.

The booming bust has led to a falling out in our industry. The high-street kettles are calling the debt-management pots black. Rather than feel sorry for the banks which have written off 3.2bn in bad debts, spare the pity for yourself. It is your money that they have misplaced.

When we first set up an agency to specialise in financial services, I was attracted by the double-entry nature of the business.

In hard times, I argued, people would be saving hard for fear of the worst and n good times they would take out mortgages, loans and splurge on their plastic cards. The banks and building societies would always have a product they wanted to advertise.

This was accompanied by various received truths. For example, “We inherit our attitudes to money from our parents, boys from their fathers and girls from their mothers.”

I found this comforting. Surely, here was an industry where nasty shocks would be few and far between. Change in our deep-rooted feelings about savings and debt would be gentle. How wrong I was.

According to research by debt solutions consultancy Thomas Charles, over a million people could face personal insolvency over the next few years.

The firm estimates that last year’s figure will grow by 50 per cent to more than 100,000 this year. PricewaterhouseCoopers expects the figure for IVAs to rise to 150,000 in 2007.

Have we no shame?

The Government wanted to abolish financial shame. If it argued that we could remove the stigma from bankruptcy, we could turn the UK into the same gung-ho entrepreneurial society as the US.

Entrepreneurs should be encouraged to try, try and try again before they hit the jackpot, even if they went broke several times in the process.

Individual voluntary agreements were created in 1986 primarily for sole traders, a halfway house rather than bankruptcy from which to make “a best offer” to their creditors.

But the reason that the banks have been caught out with bad debts lies in the enthusiastic response of consumers to the entrepreneurs of debt reduction and to the marketing of IVAs.

PricewaterhouseCoopers believes the spectacular growth, from under 5,000 in 1998 to 100,000 within a few years, is due to increased awareness.

No one is marketing bankruptcy but, according to the consultancy, the IVA route is advertised everywhere all day long and the reason they are so popular is because they are being extremely well marketed. There are many companies with no shortage of phone sales staff encouraging people to consider them.

Northern Rock chief executive Adam Applegarth has labelled them “ambulance-chasers”.

A seismic shift in psychology underlies the bald statistics. It is one that should concern anyone in financial services. The Government was taken by surprise by the enthusiasm of students for going bankrupt on completion of their studies. The Treasury moved smartly to protect its interests. Under guidelines introduced in 2004, student loans must be repaid even after bankruptcy. The Student Loans Company says over 4,000 of its borrowers have declared bankruptcy, with 3,486 still insolvent.

Equifax found that 11 per cent of 2006 soon-to-be students are considering taking advantage of the bankruptcy laws if they get into too much debt.

Another received truth when I first started was that women are more financially prudent than men – that they are less inclined to take risks. Well, that was yesterday.

The proportion of women bankrupts has risen from 32 per cent in 2002 to 44 per cent for the last 12 months. By the end of the decade, they will account for half. Women today are more extended than their mothers. Twenty-three per cent of new mortgages are taken out by single women, double the figure of 20 years ago.

The cost to banks is reaching critical levels. The Government is unabashed. The Insolvency Service now proposes a simple individual voluntary arrangement (Siva) to speed up and simplify the process and make the programme more accessible to people in debt.

Sivas are expected to come into force in autumn 2007. Not much comfort there for the bankers who would like to see debt management and IVA companies regulated by the FSA.

How far are the banks justified in complaining about the advertising? Well the use of language does seem to encourage the get-out-of-jail-quick approach to financial management.

Press and TV ads compete with how much the future IVAers can “write off” and “only pay what you can afford”.

One company claims that it is an “almost unbelievable solution”, well paying back only 5,000 from a 50,000 debt does seem just too good to be true.

Many imply this is a scheme linked to the Government, or mysteriously little-known legislation, which is stretching the truth a bit. In many ways, this unregulated area of financial services contains some of the most aggressive direct-response advertisements in the industry.

The internet is more of a curate’s egg. Here are some of the claims I found: “Reduce your debts by up to 95 per cent”, “Stop worrying and clear 90 per cent of debts”, “Write off up to 75 per cent and protect yourself from creditors.”

In truth, under a typical IVA, you will repay at least half the capital you owe. An insolvency practitioner is not there to get you the chea-pest deal but to work out the most you can afford to pay.

I wrote of the double-entry nature of an agency’s work in financial services. One man’s savings was another man’s loan. With luck, we might have clients on both sides of the ledger.

When we started, I looked to mortgages, savings and investments to pay the bills. Having heard Lord Griffiths, former director of the Bank of England, claim that “Debt is a timebomb which could be triggered by any number of shocks to the economy”, we shall be trying to get our share of the bust-boom.

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Shop talk

About 15 years ago, shortly after becoming a journalist on this newspaper, I had an interview with a life office senior executive.

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