How Does Bankruptcy Compare With An IVA?
If you’re struggling with debt and feeling pressured by creditors, there are several debt solutions available. Two paths towards debt recovery that are frequently taken are Individual Voluntary Arrangements (IVAs) and bankruptcy.
Here, Bennett Jones take you through the advantages and disadvantages of both so that, when you’re exploring options to help you get back to solvency, you can make an informed decision.
A bankruptcy order may be obtained through the courts by any creditor owed more than £5,000. An individual can also make an online application for their own bankruptcy. Your assets will then usually be sold (subject to certain exemptions) and the money is used to pay your creditors as much as possible. This can include your home, although your Trustee will discuss with you if this can be avoided.
In most cases, discharge from bankruptcy occurs after one year and your creditors cannot make further claims against you. However, if some of your assets remain unsold at the date of your discharge, they will still remain available to your creditors and your Trustee can still sell them.
The cost of bankruptcy is £680. This is made up of a deposit of £550 for managing your bankruptcy plus a £130 bankruptcy application fee. For further information about the costs of making your own bankruptcy application, see The Insolvency Service page on the GOV.UK website. A bankruptcy application cannot be submitted online until the full fee has been paid, however arrangements to pay the fee by instalments are possible.
What are some of the advantages of bankruptcy?
- If you are facing bankruptcy for the first time, you will normally be discharged after no more than one year from the date of bankruptcy and will be debt-free unless you have breached provisions of the Insolvency Act, e.g. by hiding assets.
- Bankruptcy can provide you with a fresh start which protects you from your creditors.
- If you have no assets, a limited income, and you are in employment which is not affected by bankruptcy, it may be a better option than an IVA.
- The process can be very swift if you choose to make your own application for bankruptcy.
What should I be aware of before opting for bankruptcy?
- The possible loss of your home.
- You may struggle to secure rental accommodation.
- The stigma of bankruptcy and the possible publicity resulting from the bankruptcy order.
- You may face difficulties in obtaining banking facilities following bankruptcy.
- The effect on your credit rating [LINK] both during the bankruptcy and thereafter.
- Some employers and professional organisations take bankruptcy very seriously, and this may mean you struggle to continue in your field of employment.
- Following discharge, you may find it is difficult or more expensive to obtain a mortgage or other forms of credit (e.g. car finance).
- Bankruptcy is entered onto a public register.
Individual Voluntary Arrangement (IVA)
An IVA is a legal agreement that allows you to repay only what you can reasonably afford to your creditors over a pre-determined period of time – typically around five years. These payments are made in monthly sums and are split between your creditors after paying the costs of the IVA.
As a formal insolvency solution and alternative to bankruptcy, every IVA is established and overseen by a licensed Insolvency Practitioner who acts as the mediator between you and your creditors.
The costs of an IVA can vary; they are normally borne by your creditors who receive what is left after payment of the costs. In all cases, the costs of the IVA will be clearly explained to you before you agree to proceed.
Why would I choose an IVA over bankruptcy?
- You can typically be debt-free in five years or less.
- Often there is one single affordable monthly payment.
- All creditor action is stopped, and interest and charges will be frozen as part of a legally binding agreement.
- In almost all IVAs there is no need for you to consider selling your home.
- Assets can be excluded if creditors agree.
- An IVA may cause little or no difficulty continuing in your profession.
- You are likely to find it easier to continue trading if you operate a business; you can also be a director of a limited company.
- It can be perceived that there is less stigma than bankruptcy and your privacy is protected.
What are the risks of an IVA?
- There is a risk that you may agree to pay an amount (usually by way of a monthly payment) that you cannot afford.
- There is no guarantee that your creditors will agree to the IVA Proposal (although you need only secure 75% of the creditors’ agreement via a vote to approve the IVA).
- It can have an adverse effect on future credit.
- If you do not do as proposed in the IVA (e.g. keep up with monthly payments) and the IVA fails, you may find that only a small amount of your debt has been paid off.
- An IVA is entered onto a public register.
When faced with debts, it can be overwhelming to be presented with many different methods to achieve solvency. For more information on both of the options outlined above, speak to one of our advisers completely free of charge on 0800 7710 073 or via our contact form.