Share slump hits debt companies

IVAs have become an increasingly common way of dealing with debt

Shares in several debt management companies have slumped after two of them issued profit warnings on Friday.

The companies specialise in arranging individual voluntary arrangements (IVAs), a form of insolvency.

Debt Free Direct and Accuma admitted that some creditors were now refusing to agree some of the IVA proposals proposed on behalf of their debtors.

Shares in Debt Free Direct were down a third, while those in Accuma were down by about 20%.

Shares in Debtmatters were about 30% lower while those of Debts.co.uk fell more than 9%.

Changing attitudes

An IVA is an alternative to bankruptcy, under which people come to an agreement with their creditors, typically banks and other lenders, to have some of their debts written off and repay the rest over a number of years.

A few months ago the IVA business seemed to be a growing market.

Debts.co.uk, for instance, told investors last October that business was booming and it expected soon to be processing 500 IVAs a month, earning a large commission on each one.

However, if creditors decide to adopt a harsher attitude, for instance by pressing for bankruptcy or demanding that IVA firms cut their own fees, then the business model underlying these companies could be damaged.

Debt Free Direct blamed its short-term gloom on increased advertising by its rivals and what it called "creditor posturing" for a slowdown in the growth rate of new IVAs.

Accuma warned of a lower-than-expected level of new business, blaming "increased resistance amongst a small minority of creditors which is impacting IVA approval rates".

Both Debtmatters and Debts.co.uk said that despite the increased competition and the experience of their rivals they were confident their businesses had a robust future.

Booming business

The last couple of years have seen a sudden growth in businesses offering IVAs as a way for people to escape their debts.

Widely advertised on daytime TV and in the press, they have encountered considerable criticism from various quarters.

Earlier this month, the Office of Fair Trading (OFT) wrote to 17 IVA companies telling them to stop publishing false claims in their adverts, for instance by suggesting that people could write off up to 90% of their debts through an IVA.

Debt counselling charities have suggested that some people have had IVAs arranged for them when it has not been appropriate - for instance, if people have too little continuing income to make any reasonable repayment of their debts.

And in the past year several banks have become vocal critics of the apparent ease with which some debtors can escape part of their debts by putting forward an IVA proposal.

Their increasing popularity has led to the UK's High Street banks writing off several billion pounds of bad debts between them, often built up on credit and bank loans.

However, the authorities have pointed out that an IVA is a voluntary agreement and that no lender is compelled to agree one.