IVA vs Bankruptcy – which is right for you?

Author Name MIchael Weaver Article date April 10, 2022

Having unsecured debts is a position that no one wants to be in. Whatever your financial situation, it’s stressful being contacted by debtors and collectors. There’s no need to put yourself under extra stress, though; here at IVA Helpline, we can advise you on the debt solutions available.

Both IVAs and bankruptcy are potential options if you owe money that you’re unable to pay off.

This guide will take you through everything you need to know about IVAs and bankruptcy. Before weighing up the pros and cons of each of these formal debt solutions, we’ll explain what they are and their impact on your life.

Understanding individual voluntary arrangements and bankruptcy will allow you to make an informed decision about your finances. Get in touch with IVA Helpline on 0800 464 7235 today for confidential debt advice that will help you move towards a debt-free future.

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What Is An IVA (Individual Voluntary Arrangement)?

An IVA- an individual voluntary arrangement- is a legally binding agreement, agreed upon by an insolvency practitioner between you and your creditor/s.

Whatever your income and assets, it allows you to pay off your debt in manageable monthly chunks.

Usually, an IVA lasts for five years, with an option for a 12-month extension. Over this period, you pay back the entirety of what you owe, while any interest or charges on your debt is frozen. Debtors cannot contact you during this period, as you’re making regular payments towards your debt.

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What Is Bankruptcy?

Bankruptcy is a formal debt solution available to those with unpayable debts. The bankruptcy process takes an average of 12 months but can take up to three years in total.

Rather than an insolvency practitioner, bankruptcy is carried out by an official receiver who works for the Insolvency Service to monitor the process. After handing over any assets or property, your debts get struck, freeing you up for a completely fresh start.

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Our trained advisors are here to help, so if you think an IVA proposal is one of the best debt solutions for you, don’t hesitate to call us on 0800 464 7235 to speak to one of our trained debt advisors or click below to see if you qualify…

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Advantages Of An IVA

IVAs are a popular debt solution because they have several benefits. Here are just some of the advantages of taking out an IVA with an insolvency service to pay off your debt:

  • Your charges and interest are frozen. This prevents you from racking up further debt while trying to pay off the initial amount you owe.
  • You can exclude your assets from the agreement, meaning that you can retain any homes or vehicles you own whilst paying off your debt, subject to your creditor’s approval.
  • It’s easy to pay via direct debit or bank transfer. Once your IVA is set up, you’ll pay a set amount of your debt off each month. Without debtors bothering you, this gives you security and allows you to plan for the future.
  • It shouldn’t affect your employment unless you’re in select professions like law or finance. In most professions, having an IVA won’t pose an issue. You are not legally obliged to disclose your IVA to employers, meaning only future creditors will be able to access your file on the public Insolvency Register.

Drawbacks Of An IVA

  • It can affect your credit history because it shows up on your credit file for around three months after the agreement term ends. You may find it very difficult to obtain credit during this time, such as for a mortgage or a new car.
  • An IVA can fail, if you fail to pay your arranged amount monthly, or if you violate its terms. In this case, bankruptcy will usually follow. This makes an IVA a risky choice for anyone with a very low income or in an unstable financial position.
  • Windfalls are included in your IVA payments. If you unexpectedly come into money, such as through an inheritance, you are legally obliged to inform your IVA practitioner. Usually, your windfall will have to be paid (at least in part) into your IVA plan.

Advantages Of Bankruptcy

Bankruptcy may be a good solution if your debt cannot realistically be paid off with an IVA. Here are some of its benefits:

  • It provides a completely fresh start. Once the process is complete, you get your debt written off, allowing you to quickly move on with your life.
  • Bankruptcy is a far quicker process than other debt solutions, like IVAs. Most bankruptcies are complete within a year, though they can take up to 3 in some cases.
  • Bankruptcy is a good option for those with a low or no income because you don’t have to make regular payments. Instead, asset equity is seized and used to pay debtors.

 

Drawbacks Of Bankruptcy

There are some situations in which bankruptcy isn’t a great solution. Here are some of the drawbacks you can expect when declaring bankruptcy:

  • Depending on what the official receiver decides, you can lose your assets, such as equity in a home. This is because bankruptcy entails the liquidation of your assets. You may be forced to sell and vacate your home when declaring yourself bankrupt.
  • Bankruptcy carries higher fees than an IVA does, making it more expensive initially.
  • Because you have to declare bankruptcy, it shows on your credit rating for up to 6 years. It can prohibit you from holding certain jobs in regulated professions, like a solicitor, accountant, doctor, MP, or company director.

IVA vs Bankruptcy: For Business Owners

If you’re a business owner, here is how an IVA will affect you:

  • With an IVA, your insolvency practitioner will not have a claim over your company or its assets.
  • This means that you can continue trading and operate your business bank accounts like normal.
  • Provided you keep up with payments, your business can be kept out of your debt insolvency plan completely.

Bankruptcy, on the other hand, will affect your business differently:

  • When you declare yourself bankrupt, your business will be shut down immediately.
  • Any business assets will be handed over, and the official receiver decides where the lump sum raised by this will go.
  • If your business doesn’t have any assets, bankruptcy may still be a good solution. However, if your business would be difficult to re-start, you may want to opt for a different debt solution.

 

IVA vs Bankruptcy: For Home Owners

Here are the IVA implications that homeowners must consider:

  • With an IVA, you could potentially be asked to remortgage your home six months after the end of the agreement period. If this isn’t viable, you can instead make payments for another year.
  • If you choose an IVA, you won’t need to worry about losing any property because your assets will not be seized in the process.

If you’re a homeowner, bankruptcy can affect your property in these ways:

  • When you declare bankruptcy, your official receiver decides what happens to your property equity. You may have to sell your home equity and vacate once this decision is made.
  • If you have less equity or negative equity, you’re less likely to lose your home (although it’s still an option).
  • As with any other assets, you may have to sell the property to pay off your debts.

IVA vs Bankruptcy: Impact On Employment

In some select circumstances, entering into an IVA can affect your job:

  • Although an individual voluntary arrangement is public, you are not obliged to disclose your insolvency to employers.
  • Despite being on public record, it’s unlikely that anyone aside from creditors and potential lenders will access your information on the Insolvency Register.
  • An IVA won’t affect your employment unless you’re in a few select roles, like accountant or solicitor.

Bankruptcy, on the other hand, can have a marked impact on your employment:

  • Certain professions– like MPs, company directors, estate agents, dentists and doctors- are prohibited from working after being declared bankrupt.
  • If you’re not in one of these affected professions, though, bankruptcy shouldn’t impact your employment.

Conclusion – Which Debt Solution Should You Choose?

Your chosen debt solution entirely depends on your situation. Although bankruptcy’s social stigma may put you off, both IVAs and bankruptcy are paths forward out of your debt, and towards a fresh start.

When determining which debt solution is the best pick for you, consider the implications of both plans, as discussed above.

Determine how your home, assets or business may be affected by both an IVA and bankruptcy. Reflect on your income and your ability to make regular payments. Are you in a position to pay a monthly sum toward what you owe, or do you have any assets which can go towards paying off your debt?

You should consider opting for an IVA if…

  • You have assets (like property or vehicles) that you cannot lose.
  • You’re a business owner who would be unable to start again from scratch after declaring bankruptcy.
  • You have a salary that would enable you to make monthly payments toward your debt easily.
  • You hold a job that would be affected by bankruptcy- such as if you’re a company director, dentist, doctor, estate agent or accountant.

You should consider bankruptcy if…

  • You don’t have any spare income, or you’re in a financially unstable situation that would prevent you from committing to regular payments.
  • You want a fresh start as soon as possible.
  • You don’t have any assets or don’t mind selling your assets to pay off your debt.
  • Your employment is unlikely to be affected, such as if you work for someone else, or if your company would be easily re-started after your bankruptcy.

Get In Touch With IVA Helpline For IVA And Bankruptcy Advice

Trying to weigh up your options can be stressful, especially if you’re unfamiliar with the debt solutions available to you.

If you’re still struggling to determine the best path forward, get in touch with IVA Helpline today. We provide confidential, professional debt advice, including information about individual voluntary arrangements and bankruptcy proceedings.

Whatever situation you’ve found yourself in, call us on 0800 464 7235. Our expert advisers can help you to sort out your finances, whether that means declaring bankruptcy or entering into an individual voluntary arrangement. Within no time, we’ll help you to figure out the route towards a debt-free future!

Frequently asked questions

  • Will an IVA or bankruptcy have a bigger impact on my credit file?

    Because you’ll be listed on the Insolvency Register, an IVA will affect your ability to obtain credit for the duration of the agreement. This is usually 5 or 6 years. After this period, you will be removed from the register, and your credit will recover after you pay the agreed amounts.

    A bankruptcy will have a bigger impact on your credit because it can have a negative effect for up to six years from your declaration (even once the proceedings are finished). It can cause you trouble when trying to open a new bank account, as well as getting a mortgage or renting property for years after your bankruptcy.

  • Are there risks involved with declaring bankruptcy?

    There are 3 main risks associated with declaring yourself bankrupt. Bankruptcy can have an impact on your:

    Assets: If you have assets, which includes everything from home equity to personal savings, you can expect these to be seized as part of the repayment process.

    Employment: If you’re a business owner, your business will be shut down immediately. If you work in a regulated profession (such as law, banking or accountancy), you can be disqualified as a member of the professional body.

    Credit rating: Bankruptcy will make it very difficult to obtain credit for the next six years. Even after your proceedings are finished, you may find it hard to open a bank account or even rent property as a tenant.

  • Can I lose my home with an IVA?

    Because assets are not usually included in IVAs, you won’t have your home seized as part of an individual voluntary agreement.

    After the initial five year period of your IVA, you may be asked to remortgage your home to make further payments. However, this won’t happen if you can’t afford it, so you don’t need to worry about losing your home with an IVA.

  • How can I find a reliable insolvency practitioner?

    The UK Government’s website (GOV.UK) has a list of authorised insolvency practitioners who can set up an IVA for you.

    Alternatively, you can get in touch with your local Official Reciever’s office – contact details can be accessed on the GOV.UK website.

    For more advice about finding insolvency practitioners, head over to the Citizens’ Advice website.

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