A third specialist insolvency company yesterday admitted that it was experiencing “increasing competitive pressure”, adding fresh impetus to the near-panic tearing through the once booming industry.

Shares in Debtmatters Group, one of the biggest three operators in the mushrooming business of individual voluntary arrangements (IVAs), plunged by 29 per cent to 163p.

The scare began on Friday morning when the rival IVA company Accuma warned shareholders that some creditor banks were increasingly reluctant to agree IVAs. Its shares halved.

After the share market closed on Friday, the industry leader, Debt Free Direct, also issued a warning, saying that it would be “challenging” to meet profit expectations this year. Yesterday became the first chance to react, and traders marked the shares 36 per cent lower to 267p.

The souring sentiment even hit Debts.co.uk, despite its insistence in a statement yesterday that its first-half trading had met best expectations with no erosion of margins. Its shares fell 12½p to 118½p.

However, the companies and analysts put a brave face on the prospects for the sector, arguing that firms offering IVAs — a less drastic alternative to personal bankruptcy — continued to be in a strong negotiating position.

Debt Free Direct described the banks’ more aggressive stance as “posturing” and analysts, too, suggested that the IVA business model — which has underpinned the flotation of half a dozen specialist IVA companies in the past few years — was not broken.

Martin Cross, of Altium Securities, said that he believed that the industry’s difficulties were “a temporary hiatus” and that IVA firms were in a stronger negotiating position than the high street banks.

Banks have been demanding better terms on IVAs, refusing to agree pacts where debtor customers walk away from a high proportion of their liabilities.

However, Mr Cross said that for banks, the alternatives to IVAs were even worse: either banks would have to force their debt-crippled customers into full bankruptcy or sell their debts to debt collectors.

In either case they were likely to recoup less than the 30p to 45p in the pound typically recovered through IVAs.

Meanwhile, the pool of British people in inescapable financial difficulties is estimated at one million to two million, suggesting a plentiful pipeline of new business for the IVA industry.

IVAs, dubbed “bankruptcy lite”, enable borrowers to walk away from part of their debts in return for agreeing to a five-year repayment plan for the rump of the liability.

Rising indebtness, combined with blanket advertising by IVA firms, has persuaded tens of thousands of people to opt for IVAs. The stigma of personal insolvency has also lessened in recent years. Last year UK banks wrote off £1.4 billion as a result of IVAs.

Banks argue that advertising by IVA firms is sometimes misleading and that it is not properly explained to clients that their credit rating is blackened.

There are now at least 500 firms offering IVA advice.

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