When dealing with unmanageable debt, it’s important to understand the available solutions. Both bankruptcy and IVA are formal debt solutions that can help you manage and clear your debts. Two common options in the UK are Bankruptcy and an Individual Voluntary Arrangement (IVA). Both can help you clear debts, but they work differently and can impact your assets, credit score, and lifestyle. This guide will explain the key differences between these two options to help you make an informed decision.
What is Bankruptcy? #
Bankruptcy is a formal legal process that helps individuals write off debts they cannot afford to repay. When you declare bankruptcy, a bankruptcy order is issued, which outlines the debts that will be cleared and the restrictions placed on your assets. Control of your valuable assets (such as your home or car) is handed over to the Official Receiver, who may sell them to pay off your debts. Bankruptcy offers a fast route to becoming debt-free but comes with significant consequences and restrictions.
Key facts about bankruptcy:
-
Debts you can’t afford to repay are written off.
-
You may lose control of valuable assets.
-
You face restrictions on borrowing and certain professional roles.
-
Bankruptcy usually lasts 12 months, but some restrictions can last longer.
For further information, visit the UK Government Bankruptcy page(LINK 1).
What is an IVA? #
An Individual Voluntary Arrangement (IVA) is an alternative insolvency solution that allows you to keep control of your assets while repaying a portion of your debts. An IVA is a formal agreement with your creditors to make affordable monthly payments over a set period, typically five years. In some cases, you may be required to release equity from your home by remortgaging towards the end of the IVA period. At the end of this period, any remaining unpaid debt is written off.
Key facts about an IVA: #
- You make monthly repayments based on what you can afford.
- You keep control of your assets, such as your home or car.
- IVAs generally last for up to five years.
Eligibility Criteria for Bankruptcy and IVA #
To determine whether bankruptcy or an IVA is the best option for you, it’s essential to understand the eligibility criteria for each. Here are the key factors to consider:
Duration and Cost #
Bankruptcy typically lasts for 12 months, making it a quicker way to become debt-free. If you are a homeowner in negative equity, your home is less likely to be sold during bankruptcy proceedings. However, it requires an upfront fee of £680 before proceedings can begin, and you may lose valuable assets.
An IVA lasts longer, usually up to five years, but the costs are built into your monthly repayments. This means you don’t need to pay upfront, making it more affordable over time.
Impact on Credit File #
Both bankruptcy and an IVA will affect your credit file for six years from the start date. Both bankruptcy and IVA can help manage and clear unsecured debts, such as credit card debt and personal loans. This can make it difficult to borrow money or access credit during this time. Lenders will see that you’ve entered a formal debt solution, which may affect their willingness to lend to you.
How Does an Income Payments Agreement Work? #
An Income Payments Agreement (IPA) is part of the IVA process. Under an IPA, you make regular monthly payments based on your income and what you can afford. These payments are agreed upon with the help of an Insolvency Practitioner (IP). In most cases, the IPA lasts for the entire term of the IVA, which is usually five years.
In bankruptcy, you might be required to make monthly payments if your income exceeds your basic living costs. These payments typically last for up to three years.
How Much Debt Will Be Written Off? #
Both bankruptcy and an IVA provide an opportunity to write off debts:
- In an IVA, any remaining unpaid debt will be written off after the five-year period.
- In bankruptcy, all outstanding debts are generally cleared after 12 months.
The amount of debt written off depends on your personal circumstances and the agreements made with your creditors.
Long-term Financial Implications #
Both bankruptcy and an IVA can have long-term financial implications that can affect your credit rating and ability to obtain credit in the future. Here are some key factors to consider:
Debt Relief Order (DRO) #
A Debt Relief Order (DRO) is a debt solution for individuals who owe less than £30,000 and have little or no disposable income. It offers a simpler, lower-cost alternative to bankruptcy for those who meet the eligibility criteria. A DRO lasts for 12 months, during which time your creditors cannot take action to recover your debts. After this period, the debts are written off.
For more information, visit the (https://www.gov.uk/options-for-paying-off-your-debts/debt-relief-orders).
Debt Management Plan (DMP) #
A Debt Management Plan (DMP) is an informal arrangement with your creditors to repay your debts at a rate you can afford. A DMP does not involve any legal proceedings, and it does not offer debt write-offs, but it can help you manage your debt more easily.
Role of an Insolvency Practitioner #
An Insolvency Practitioner (IP) is a licensed professional who helps individuals find the best debt solution for their circumstances. An IP can provide tailored advice, assess your financial situation, and guide you through the process of setting up an IVA or declaring bankruptcy. Their role is crucial in helping you manage your debt efficiently.
What to Expect When You Declare Bankruptcy #
To declare bankruptcy, you must fill out an online application and pay a fee of £680. Once the application is processed, the Official Receiver will take control of your assets, which may be sold to pay off your debts. After 12 months, you will typically be discharged from bankruptcy, meaning you are no longer responsible for your debts.
How Will Bankruptcy or IVA Affect My Vehicle? #
- Bankruptcy: You may have to surrender your vehicle unless you can prove it is essential for your daily duties, such as getting to work.
- IVA: You can usually keep your vehicle in an IVA, as long as its costs are factored into your monthly payments.
How Will Bankruptcy or IVA Affect My Job? #
- Bankruptcy: Certain jobs, such as company director or positions in financial services, may be affected by bankruptcy.
- IVA: An IVA is less likely to impact your job, but there may be specific industries where an IVA is considered a negative factor.
Emotional and Psychological Impact #
Declaring bankruptcy or entering into an IVA can have a significant emotional and psychological impact on individuals. Here are some key factors to consider:
Conclusion: Choosing the Best Option for Your Financial Future #
Both bankruptcy and an IVA are effective debt solutions, but they come with different consequences and commitments. It’s essential to choose the option that suits your personal situation. Bankruptcy offers a quicker route to becoming debt-free but comes with more restrictions, while an IVA allows you to maintain more control over your assets but requires a longer-term repayment plan. Understanding the differences between IVA or bankruptcy can help you make an informed decision about which option is best for your financial future.
For more guidance on which option is right for you, consider speaking to an Insolvency Practitioner or seeking advice from organisations like Citizens Advice or reviewing government resources for further information.