BusinessCorporate FinanceBankruptcy – a better option

Bankruptcy - a better option

The new insolvency watchdog has a tough task ahead

The publication of the personal insolvency statistics for the third quarter
of 2006 has done nothing to allay either the impression that Britain’s debt
crisis is out of control, or that some within the burgeoning debt management
industry are working primarily with their own financial interests at heart.

While bankruptcies are up 26.6% on the same period last year, IVAs have
increased by 117.9%. It is clear that many IVAs have been arranged, not because
they are in the best interests of the debtor, who in most instances will face
five years of hard struggle to maintain payments, but because they represent a
better source of income for the arranger.

Firms would do well to note the legal steps taken against companies
mis-selling pensions and mortgages in the 1980s and 1990s.

Following hot on the heals of the Insolvency Service figures came the
announcement that the Debt Resolution Forum is being set up by the Insolvency
Practitioners Association to provide a voice for the industry and act as
regulator.

The creation has to be welcomed, but the forum will have to fight hard to
establish its credibility when less scrupulous companies continue to operate
outside its authority, undermining the reputation of the sector.

The forum’s standards must be rigorous, members must back them and breaches
of its code must be condemned. To succeed, it must be vocal around the whole
issue of debt and the pros and cons of the various ways of dealing with it,
otherwise it will be dismissed as a mouthpiece for the indefensible.

Once the standards are agreed, I urge the forum to campaign around the range
of insolvency issues, targeting consumers and, in particular, young people for
whom debt is becoming a way of life.

The key to the industry’s reputation is blindingly obvious: people in debt
and facing the threat of insolvency must be given the advice that is in their
best interests rather than those of IVA salesmen. A practitioner cannot assess
circumstances and give advice without meeting a debtor.

There are advantages in IVAs over bankruptcy, but these must be weighed
against the likelihood of making five years of often crippling payments. An IVA
is not a soft option and, for many, bankruptcy may be better.

The true test of the forum’s success will be the balance between bankruptcy
and IVAs in the government’s quarterly figures.

Philip Long is head of corporate recovery at PKF

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