The rise in U.K. bankruptcies and Individual Voluntary Arrangements (IVAs) have a major impact on credit card portfolio trusts because they are typically fast-tracked through to charge-offs. This would have a more immediate impact on U.K. securitization master trusts.
Fitch Ratings believes that the recent increases in bankruptcies and IVAs have been strongly influenced by the change in law that happened in April 2004, facilitating the process of declaring individual bankruptcy. IVAs were established in 1986 as a means for consumers to formally reschedule debts without declaring bankruptcy, subject to consent by at least 75% of creditors.
Recent data released by National Statistics on the number of people filing for personal bankruptcies and IVAs revealed an increasing number of people are accumulating unmanageable debt levels. Data to the end of the second quarter showed that the number of cases of IVA had increased to a new high of 11,105, up 39.5% on the first quarter data and 153% on the same quarter for 2005. Although bankruptcies have risen to 14,915 reported cases for the second quarter - an increase of 32.5% from Q205 data - these slipped 3.1% from the Q106 level of 15,389 cases.
According to market reports, the U.K. Insolvency Practitioners Association has proposed that consumer debt management companies should be regulated. The proposal for regulation stems from the recent scrutiny of debt management company practices following this sharp increase in IVAs. Debt management companies have been blamed for overly-promoting the use of IVAs among financially distressed consumers.
Fitch said that it is impossible to determine whether the increases in personal insolvencies represent an additional layer of credit risk or whether the change in law combined with the deterioration in the credit markets have accelerated charge-offs that would have occurred at some point, in any case.
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