Bankruptcy VS IVA - Which Is Right for Me?
If you’re struggling with personal debts that you cannot afford to repay, you’re mostly left with two choices: declaring bankruptcy – or – entering into an IVA.
Generally speaking, bankruptcy allows you to resolve your debt issues quickly. In contrast, an IVA allows you to hold onto your valuable assets while you repay your debts over an extended period.
Knowing which solution is right for you can be tricky. In this guide, we’ll be helping you to understand how each process works, alongside their respective pros and cons, to help you come to a decision.
Contents
What Is Bankruptcy?
Bankruptcy is a formal insolvency procedure which allows people to write off debts that they cannot afford to repay.
Once you declare bankruptcy, you surrender control of your valuable assets – such as your home and your vehicle – to the Official Receiver. This is the government official who oversees your bankruptcy. They’ll sell these in an attempt to repay your creditors.
You may also be expected to give up other valuable items, such as jewellery. You won’t have to give up your everyday belongings, such as clothes and other household essentials.
When you declare bankruptcy, you’ll also enter a 12-month period of statutory restrictions. These measures generally function to help keep you debt-free by preventing further borrowing. It’s important you follow the restrictions, or they’ll get extended by a Bankruptcy Restrictions Order.
After just 12 months, all of your debts will be written off.
- You cannot borrow more than £500 without disclosing that you’re bankrupt
- You cannot have a bank account with an overdraft
- You cannot work certain jobs (accountant, lawyer, etc)
- You cannot create, manage, or promote a company
What Is an IVA?
An Individual Voluntary Arrangement – or IVA – is an insolvency procedure which allows you to keep hold of your valuable assets. In exchange, you repay a portion of your debts over a 5-year period.
To enter into this solution, you’ll need the backing of 75% of your creditors, by value. This means that if you had four creditors but owed one 80% of your overall debt, that one creditor would decide if the IVA goes ahead.
You’ll make a proposition based on pence in the pound. If you owed £10,000, you could propose to repay £4000 over 5 years at a rate of 40 pence to the pound.
Over the 5 years, you’ll have to make one regular monthly payment, which gets divided between your creditors. All debts will be frozen during this time, and you will be protected from creditor legal action so long as you keep up with the payments.
Any debts remaining at the end of the 5 years are liable to be written off.
An IVA doesn’t have the same restrictions as bankruptcy. This makes it an attractive solution to some individuals – such as business owners or financial workers – as it allows them to continue life as usual. You simply need to ensure you keep up with your payments; otherwise, you may be forced into bankruptcy down the line.
What's the Difference Between Bankruptcy and an IVA?
Bankruptcy is a dramatic process, stripping you of all personal assets while lumbering you with a set of restrictions. However, it is very straightforward, with its 12-month time scale making it the quickest way to become debt-free.
An IVA, on the other hand, is a more balanced solution. It does allow you to keep your assets, but the process can take between 5-6 years to fully resolve your debt issues. If you miss any payments during this time, you could just get forced into bankruptcy anyway. That being said, if you have assets worth protecting – and a steady income – an IVA is probably the more fitting solution.
How Will Bankruptcy Affect My Living Situation?
Renters
If you rent your home, there’s a good chance bankruptcy won’t affect your living situation.
The official receiver must allow you to keep enough money to pay for your living essentials, such as rent, and they will not inform your landlord of your situation unless you fall into arrears.
That being said, your landlord could request a credit check on you anytime. Some tenancy agreements have an insolvency clause, which allows landlords to evict tenants should they enter into an insolvency solution such as bankruptcy. However, it’s very unlikely they’ll do this. Landlords typically only seek to evict in the event of arrears.
Home Owners
Unfortunately, selling your home is practically a given when declaring bankruptcy.
The official receiver may allow you to keep your home if it has no equity. However, they have 2 years and 3 months to make a decision on what to do with your property. If the value goes up at any point, they might want you to sell it.
All in all, most bankruptcies require homeowners to surrender their property.
How Will an IVA Affect My Living Situation?
Renters
If you rent your home, an IVA is very unlikely to affect your living situation.
The IVA proposal (drawn up with the assistance of your insolvency practitioner) will be made with your monthly living costs in mind. This means you’ll have enough money for essentials like the rent.
While an IVA may technically violate the insolvency clause of some tenancy agreements, landlords are very unlikely to evict paying tenants. If your rent is increased at any time during your IVA, make sure you speak to your insolvency practitioner. They may be able to renegotiate the cost of your monthly payments.
Home Owners
One of the main advantages of an IVA is that you can expect to retain ownership of your property.
However, you will probably be asked to remortgage during the last 6 months of your IVA. Typically, if there is £5000 or more of equity, you’ll be expected to put 85% of it into your IVA.
If this isn’t feasible, you can just make your IVA contributions for an additional 12 months instead.
How Will Bankruptcy Affect My Vehicle?
When you declare bankruptcy, you’ll probably be expected to surrender any vehicles in your name.
You may be allowed to keep your vehicle if you can prove it’s essential. For example, you may need it to commute or perform your daily duties at work.
If you can prove it’s essential, you may still be expected to sell the vehicle in exchange for a more modest one.
How Will an IVA Affect My Vehicle?
You’ll be allowed to keep your car in an IVA.
Your IVA proposal will factor in the monthly costs of running your vehicle so that you can keep it road-worthy.
You may be expected to swap your vehicle, if it’s a luxury model, for a more modest one.
Is Bankruptcy or an IVA Better for My Credit Score?
Many assume that an IVA, with its more forgiving set of restrictions and stipulations, will be better for their credit score than bankruptcy.
Surprisingly, this isn’t the case.
Both bankruptcies and IVAs have a near-identical effect on your credit score. Both procedures remain on your credit score for 6 years and make it very difficult to take out sizeable amounts of credit in the future. If you do manage to get a loan, chances are it will be subject to a high-interest rate.
This isn’t necessarily a bad thing; being left unable to take out further loans will help you to keep out of debt in the future.
How Do I Decide Between Bankruptcy and an IVA?
The best way to understand the right solution for you is to get in touch with an insolvency practitioner. Our expert team can assess your situation and guide you to the best possible outcome.
Trying to decide on your own is a risky move. You could end up needlessly losing your property or career prospects via bankruptcy, or you could enter into an IVA with unreasonable payments, causing you to have to declare bankruptcy anyway.
If you’re struggling with your personal finances, get in touch to book a free consultation today.
