IVA vs bankruptcy: What is the best option for you?

  • IVA vs bankruptcy: What is the best option for you?
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Overview:

This article will explain IVAs and bankruptcies in further detail so you can make an informed decision about how best to deal with your unaffordable debt and take the first step towards a healthier financial future.

If you’re struggling to afford your financial obligations, there are various debt solutions available to help you repay what you owe and make a fresh start with your finances, such as entering into an IVA and filing for bankruptcy.

However, while both are common debt solutions that can help you become debt-free, there are several similarities and differences between them.

What is an IVA?

An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors (the individuals or businesses you owe) to repay your unsecured debts through a series of monthly payments based on what you can comfortably afford.

Because IVAs are legally binding, they can only be set up and managed by an Insolvency Practitioner (IP). Insolvency Practitioners are licensed debt professionals authorised to oversee your arrangement and distribute your monthly payments among your creditors.

Most IVAs last for five years (60 monthly payments) but your term can be extended by another 12 months if your repayment amount falls short of what was originally agreed. This can happen if you have a payment break, request lower monthly payments, or fail to release equity from your home, for example.

Once your IVA is complete, any remaining debt will be written off and you’ll be officially declared debt-free. This means that, despite only repaying a portion of what you owe, you won’t have to make any more payments towards the debt.

What is bankruptcy?

Bankruptcy is a legal process for dealing with debts you can’t afford to repay. While you’re bankrupt, you’ll be placed under strict spending restrictions and your assets (e.g. your home or car) can be sold to repay your debt.

Because of the severe and lasting damage to your finances, you should only ever declare bankruptcy or be issued with a bankruptcy order after all other debt solutions have been considered. Put simply, if you can afford to make monthly payments towards your debt – no matter how small – bankruptcy probably isn’t the best debt solution for you.

Once your bankruptcy ends – which typically happens after 12 months – your outstanding debt will be cleared and all restrictions placed on you will be lifted, leaving you free to spend your money as you wish.

However, if you were in a position to make regular payments towards your debt and an Income Payments Agreement (IPA) was put in place, you may be asked to continue making payments for up to three years.

What do IVAs and bankruptcies have in common?

IVAs and bankruptcies are very different debt solutions, but they do share some similarities. Here are some of the things IVAs and bankruptcies have in common:

Your credit rating will be negatively affected for six years

Both IVAs and bankruptcies stay on your credit file for six years.

During this time, your credit score will be affected and you’ll struggle to be approved for most forms of credit, including a loan, mortgage, phone contract, and even a bank account.

Your details will be visible on a public register

Once you enter into an IVA or bankruptcy, your details will be added to the Individual Insolvency Register (IIR) which is maintained by the Insolvency Service.

This is a public record of all IVAs and bankruptcies but is typically only accessed by lenders, employers, and landlords when they need to verify details of your insolvency or check your credit history.

Your remaining debt will be written off

When you leave an IVA or bankruptcy, any remaining debt will be cleared, spending restrictions will be lifted, and you’ll no longer be asked to make payments towards the debts included in your arrangement.

This will leave you in a position where you’re free to move on with your life and take positive steps to gradually rebuild your finances.

Your creditors will stop contacting you

Because IVAs and bankruptcies are formal debt solutions, your creditors will be instructed to stop contacting you about the debt and can only contact you through the third party managing your arrangement.

With no creditor contact to worry about, you can focus on dealing with your debts without the added stress of being contacted or harassed for payment.

You can start afresh with your finances

Both IVAs and bankruptcies are designed to give you a fresh start with your finances by clearing you of your unaffordable debt.

So regardless of which debt solution you choose, you can rest assured you’re well on your way to a fresh financial start. 

What are the main differences between IVAs and bankruptcies?

Despite sharing several similarities, IVAs and bankruptcies are still vastly different debt solutions. Here are some of the main differences between IVAs and bankruptcies that you should be aware of:

The duration

One of the biggest differences between IVAs and bankruptcies is how long each debt solution lasts. For example, a typical bankruptcy lasts 12 months while an average IVA lasts five years (six if your arrangement is extended).

Remember, if you make repayments during your bankruptcy, you may need to continue making payments for another three years (four in total).

The cost

IVA costs differ between providers but are typically incorporated into your monthly repayments so you’ll never be asked to make extra payments at any point during your arrangement.

When you file for bankruptcy, however, administrative fees tend to be higher and a fee of £680 will be required before proceedings can begin.

The impact on your job

Being in an IVA is unlikely to affect your job and will usually only cause problems if you work in certain industries, such as financial or legal services.

However, bankruptcy has stricter rules around when it comes to which jobs you can and can’t do. For example, you may be asked to leave your job if you’re a company director, work for the government, or have a regulated profession.

The level of income required

When you enter an IVA, your monthly payments will be calculated based on how much you can comfortably afford after your essential living costs have been taken care of. This means that as long as you can afford a reasonable amount and your creditors agree to that amount, there is no minimum income required.

However, while there is no minimum income required to file for bankruptcy, your level of income will determine whether or not you’ll be asked to make payments during your bankruptcy.

The impact on your home

One of the most common questions among those considering a debt solution is how it will affect their home. However, the only time an IVA will affect your home is when you’re asked to remortgage during the final year of your arrangement to release extra funds.

While you’re bankrupt, however, you must hand over control of your assets, including your home, meaning it can be sold at any point to recover your debts. The only time your home may not be forcibly sold is if you have negative equity.

Why should I consider an IVA?

There are many advantages to entering into an IVA rather than filing for bankruptcy. Here are some of the main reasons why people choose an IVA:

  • You’ll never be asked to pay more than what you can comfortably afford towards your debt each month
  • Your assets (e.g. home and car) will be protected and your job is unlikely to be affected
  • Your creditors will be instructed to stop contacting you about the debt and all interest and charges will be frozen
  • Your remaining debts will be written off at the end of your arrangement
  • You’ll only be required to repay a portion of your total debt

Why should I consider bankruptcy?

Like IVAs, there are many reasons why thousands of people choose to file for bankruptcy every year. Here are some of the main advantages of bankruptcy:

  • You’ll only be placed under strict spending restrictions for 12 months
  • Your debts will be cleared at the end of your bankruptcy
  • Your creditors will be instructed to stop contacting you about the debt or asking you to pay what you owe
  • You’ll be free to start afresh with your finances after your bankruptcy ends
  • You can breathe easy for 12 months knowing you don’t have to make payments or deal with your creditors

What are alternatives to an IVA or bankruptcy?

While IVAs and bankruptcies are both extremely popular debt solutions, there are several other options available.

Here are some of the most common alternatives to IVAs and bankruptcies:

Debt Relief Order (DRO)

A Debt Relief Order (DRO) is a debt solution designed for individuals who owe £30,000 or less, don’t own their home, and have little to no disposable income left over after taking care of their essential living costs.

DROs are often viewed as a cheaper, less serious alternative to bankruptcies as they don’t require any monthly payments and can allow you to write off your remaining debts if your financial situation doesn’t improve in 12 months.

Debt Management Plan (DMP)

A Debt Management Plan (DMP) can help you repay your unmanageable debt at a rate you can comfortably afford – a bit like an IVA. However, because you’ll be expected to repay your debt in full, they can last as long as necessary until your balance is cleared and, in some cases, this can be up to ten years.

DMPs are primarily designed for non-priority debts, such as personal loans, store cards, and overdrafts, and are informal, meaning you can exit the arrangement at any time with no consequences if you feel it no longer suits you.

Administration Order (AO)

An Administration Order (AO) is a formal and legally binding debt solution designed to help you repay your debts over a set period if you owe less than £5,000 and can’t afford to repay your balance in full.

AOs allow you to repay your debt in monthly instalments while putting a stop to further action from your creditors. The court will then distribute your payments to your creditors on a pro-rata basis.

How can I choose between an IVA and bankruptcy?

The decision to enter into an IVA or file for bankruptcy is not a choice that should be made lightly. Both an IVA and bankruptcy can help you deal with your unaffordable debts, but the right option for you depends on your individual circumstances.

For example, an IVA may be better suited to your financial situation if you own a property or a car that you don’t want to lose, are the director of a company, or work in financial or legal services.

Alternatively, bankruptcy may be suitable if you have no assets that you would be afraid to lose, your financial situation is highly unstable and unlikely to improve, and you want to start afresh with your finances as soon as possible.

Remember, entering into an IVA or filing bankruptcy is a serious decision and should never be viewed as a quick fix. There are advantages and disadvantages to both debt solutions and you should always weigh up your options and consider your individual circumstances before making a decision.

Conclusion

Whether you’re looking to make regular payments towards your debt or make a fresh start with your finances, you may have considered entering into an IVA or filing for bankruptcy. But while both of these insolvency solutions can help you deal with your unaffordable debts, there are many differences between them.

From how long they take to complete and how much they cost to the impact on your job and the level of income required, there are several factors that need to be considered before you make a decision.

Making the decision to deal with your debts can be daunting, but it can also be the best decision you ever make. By assessing your financial situation and seeking free debt advice if necessary, you can be confident you’ve chosen the right debt solution for you.

Key Takeaways

IVAs and bankruptcies are both popular debt solutions that can help you clear your unaffordable debt and make a fresh start with your finances
The right debt solution for you will depend on several factors, such as your debt level, your assets, and your job
Both IVAs and bankruptcies will negatively affect your credit score for six years and make it difficult to access most forms of credit
A typical IVA lasts for five years but can be extended to six while a bankruptcy only lasts 12 months
There are several alternatives to IVAs and bankruptcies, including a Debt Relief Order (DRO), a Debt Management Plan (DMP), and an Administration Order (AO)
Maxine McCreadie

Maxine McCreadie

Author/Debt Expert

Maxine McCreadie, prominent personal finance writer featured in Vogue and Yahoo News, delivers practical guidance, simplifying money management and championing financial literacy.

How we reviewed this article:

HISTORY

Our debt experts continually monitor the personal finance and debt industry, and we update our articles when new information becomes available.

Current Version

February 28 2024

Written by
Maxine McCreadie

Edited by
Ben McCormack

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