IVA or Bankruptcy? Comparisons, Analysis & FAQs
For free and impartial money advice and guidance, visit MoneyHelper, to help you make the most of your money.
They provide a way for debtors to take care of their debts. Your creditors have to stick to the terms of the agreements in both cases.
Whether an IVA is right for you or a bankruptcy depends entirely on your situation.
This is why it’s important that you know the pros and cons of both procedures so you can make an informed decision about which one you should go for.
What is an Individual Voluntary Arrangement (IVA)?
An IVA is a formal, legally-binding agreement between you and your creditors that is appointed by the court. It details the terms of how you will pay back your debt to your creditors over a certain period of time.
You only make monthly payments to your creditors based on what you can afford. When the agreed-upon duration ends, if some portion of your debt is still unpaid, it’s written off.
An IVA is a great solution for many debtors as is evidenced by the fact that thousands of Brits opt for Individual Voluntary Arrangements every year. It’s quite flexible to your needs and you have the support of an Insolvency Practitioner (IP) who ensures that you’re being treated fairly. Your assets will be protected and your creditors cannot take any court action against you throughout its course.
Your Insolvency Practitioner (IP) is the central figure that you deal with during the course of your IVA. They handle negotiations between your and your creditors. They also help you in planning your initial proposal for the IVA. Furthermore, if you need help with any other issues you may have throughout the course of it, your IP is the one who you get in touch with.
However, you must keep in mind that it is not for everybody. There certainly are risks involved that you need to consider.
For example, a typical IVA lasts for five years. During this time, you will only be allowed money for your essentials. The rest of your income will go towards your monthly payments.
Not to mention that it has a very significant impact on your credit score. It stays in your credit file for six years after the start of it. During this period, you’ll have a very hard time securing credit. Since most IVAs last five years, this means that the mention of the IVA will stay in your credit file for an additional 12 months after it has ended.
How Does Bankruptcy Work?
In bankruptcy, your assets such as your car, your house, etc. are sold in order to pay your creditors. Additionally, you may also have to make contributions towards the debt throughout the course of three years depending on your financial situation.
The central figure in bankruptcy is typically called the Official Receiver. They note your financial situation and also deal directly with your creditor. If you have assets, then the role of the Official Receiver is typically replaced by a Trustee in Bankruptcy. They deal with your affairs throughout the course of your bankruptcy.
Bankruptcy is typically much quicker than an IVA. It usually lasts about 12 months. Although, you still may have to make additional payments towards your debts for three years depending on your financial situation.
The bankruptcy ends when the Trustee in Bankruptcy discharges you. At that point, any debt you owe to your creditor(s) is written off.
When Would Bankruptcy Be Right for Me?
Bankruptcy does seem like a better option to a lot of people since it’s much quicker than an IVA. Also, you will most likely have to pay your creditor(s) a lesser amount and for a short period.
However, there are several risks to consider with bankruptcy before you decide to go for it:
- None of your assets are protected during bankruptcy. You will most likely have to sell everything from your car to your house.
- Some jobs have a condition which states that if a person goes bankrupt, they would not be legally allowed to hold that job.
- You will have difficulty securing credit for the next six years.
- Your bankruptcy will most likely be published publicly in a newspaper.
- If you own a business, it will most likely be closed down and the assets sold off.
I suggest that you go bankrupt if you’re not a homeowner, you don’t have a lot of assets and you have no spare income that you can use to pay off your debts.
When would an IVA be Right for Me?
An IVA lasts longer than bankruptcy but it has the guarantee that your assets will be protected. Not only that but it is also very flexible and ensures that you’re not paying any more than you can afford.
That being said, it has its risks as well. These are:
- If you’re a person who’s unsure of their financial circumstances, this could be the wrong choice for you. If you are unable to make too many of your monthly payments then there’s a chance that it could fail.
- If your IVA fails then your creditor will not have to abide by the terms of the agreement. Hence, they could take court action against you and attempt to make you go bankrupt.
- If you enter into it and it fails, you will be in a much worse financial position than you initially were. This is because you’ll have to pay the fees charged by your Insolvency Practitioner.
- You will have significant trouble securing credit for the next six years.
I suggest that you opt for an IVA if:
- You have assets that you want to protect such as your home, your car, etc.
- You own a business that generates steady, reliable revenue that you can use in your monthly payments.
- You have a job which you would lose in case you go bankrupt.
- You have a steady income which has a portion that you can use in your monthly repayments.
- You have a large, lump sum of money that you can use to pay your debts off all at once according to the terms of your agreement.
So, bankruptcy or IVA? I hope the information I’ve given you today is helpful in you making an informed decision towards your financial freedom.
If I had to summarise it again, I’d just say that bankruptcy is much shorter but you will most likely lose your assets whereas an IVA protects them but it lasts much longer.
Make sure that you seek advice from a professional before you make your decision and also make sure to explore all debt solutions at your disposal. You never know what could be just the right fit for your particular situation.