IVA vs Bankruptcy– Which Is Best?

An IVA (Individual Voluntary Arrangement) and bankruptcy two fairly extreme ways of managing debts that you cannot afford to repay.

They are both forms of insolvency. This means that some or possibly even all of your debt is written off.

There are some subtle differences between these two forms of insolvency, though. Bankruptcy can have a greater impact on your job and whether you can keep your home, for instance. It is important to consider your own personal circumstances before deciding which route to take.

Will I Lose My Job?

Bankruptcy can affect your job if you work in certain professions. It can also be a problem if you are a company director or a pub licensee. Your ability to work may be affected even after you have been discharged from bankruptcy.

An IVA is less likely to affect your job but could still be a problem if you are working in a senior position or in a finance-related role. There may be a clause in your contract of employment that deals with insolvency of an employee.

If you think that you might be affected it is worth taking advice before deciding what to do. If you are a member of a professional body they should be able to give you advice as to what impact bankruptcy or an IVA would have on you. You could also speak to your HR department to find out whether bankruptcy or an IVA would be an issue where your employment is concerned.

One other thing to bear in mind is the fact that bankruptcy can also make a difference if you are planning to apply for British citizenship or to sponsor an application for British citizenship that it being made by someone else.

Will I Lose My Home?

If you rent your home an IVA should make no difference. In theory bankruptcy should make no difference either, but some tenancy agreements contain a clause that says you will lose your tenancy if you are declared bankrupt. You may also lose your tenancy if you have rent arrears when you are declared bankrupt.

If you own your own home you won’t lose it if you go down the IVA route, but in the final year of your IVA you might need to remortgage it or pay another year’s worth of monthly repayments.

If you are declared bankrupt and you own your own home it is likely that the official receiver will require you to sell it unless there is negative equity. Even if there is negative equity, the official receiver can make you sell your home at any point within two years and three months if by that point house prices have gone up and at that point there is positive equity in the property.

If you are forced to sell your home due to your bankruptcy you must sell it at its market value. You cannot sell the property to a friend or family member for considerably less than the property is worth.

Will I Lose My Car?

You will normally be able to keep your car (or other vehicle) under an IVA unless it is a particularly valuable vehicle. If you own a £50,000 motorhome it is likely that will need to be sold, although if you own a £500 caravan you will almost certainly be allowed to keep it.

If you are declared bankrupt the official receiver will require you to sell your vehicle unless it is a relatively low-value vehicle and it is essential for you to have it. As an example, you would be allowed to keep your car if you need it to get to and from work.

Will People Find Out?

Obviously your lenders will be told if you are declared bankrupt. Your bankruptcy will also be recorded by the Insolvency Service and a small notice will be published in the London Gazette. If you are at risk of violence it can sometimes be possible to avoid having your address included in that notice.

There is no longer a requirement to publish details of your bankruptcy in your local newspaper. However, if you are particularly newsworthy there is nothing to stop that local newspaper reporting your bankruptcy. This might be the case if you were a celebrity or prominent local businessman.

Your employer will not be told that you have been declared bankrupt. However, they might want to know why your tax code has been reduced to zero. In practice, unless you work in a profession that places specific restrictions in terms of whether you are able to work in that profession if you have been declared bankrupt this will make little or no difference.

Although an IVA is also a form of insolvency, there is no requirement for a notice to be published in the London Gazette. However, your IVA will be recorded on the Insolvency Register so if someone wants to find out whether you have an IVA and they know where to look, they could get that information fairly easily.

How Much Do They Cost?

You have to use a licensed insolvency practitioner if you want to set up an IVA and they will charge you fees. As those fees are added to the money that you owe and as any outstanding debt is written off at the end of the five year term, in practice the fees are irrelevant.

You need to pay a fee if you decide to declare yourself bankrupt. This fee is usually £680 and must be paid before you can go down the bankruptcy route. The irony is that many people cannot afford to apply to declare bankruptcy.

How Long Do They Last?

An IVA generally lasts five years although if you own your own home and don’t want to remortgage it, your IVA can last six years because you would have to make an additional year’s worth of repayments towards your debt. Bankruptcy only lasts a year.

Both an IVA and bankruptcy will appear in your credit history for six years which means that it will be difficult for you to get credit.

Conclusion

If you have relatively high levels of debt and no realistic chances of being able to pay back that debt within a reasonable period of time, bankruptcy or an IVA are worth considering.

As a general rule, bankruptcy is more suitable if you don’t own your own home and don’t work in a job where having been declared bankrupt could mean that you lose that job.

With an IVA it takes a lot longer before you are debt free, but you get to keep your home and car, aren’t at anywhere near as much risk of losing your job..

However, there are less severe debt management solutions available, such as debt management plans. An IVA or bankruptcy should only be considered as a measure of last resort.

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