Sharp rise in rate of borrower insolvency

The number of individual borrowers forced into insolvency has increased sharply over the past three months as a result of the sub-prime credit crisis, Debt Free Direct, the market-leading provider of individual voluntary arrangements (IVAs) said.

The company, which specialises in IVAs – debt repayment plans that fall one step short of insolvency – said borrowers in financial difficulties were finding it much harder to negotiate the type of consolidation loans they would have opted for in the past in preference to insolvency.

"We think 25 per cent of borrowers who would previously have taken out a loan consolidating all their debts as a way out of trouble are now being turned down for credit," said Andrew Redmond, the company's chief executive. "The number of consumers getting into positions of over-indebtedness has not changed significantly, but the conditions in the market definitely have."

Debt Free Direct, which intends to change its name to Fairpoint in the new year, yesterday published first-half figures showing sales of IVAs were flat during the six months to the end of October. The company made profits of £5.4m, in line with the same period last year.

The company has been held back by a row over the terms on which IVAs are written – shares in debt advice companies fell sharply earlier this year after leading banks and credit card providers said they were not prepared to carry on signing up to the agreements unless better terms could be negotiated.

IVA providers have subsequently agreed to fees much more linked to the amount borrowers actually repay their creditors, a deal Mr Redmond claimed would drive many competitors out of the business. "Credit pressures have reduced the number of IVAs being processed," he said. "[But] in the last couple of months there has been a significant change in the market dynamics – IVAs being processed by the group have nearly doubled."