IVA Or Bankruptcy

If you’re feeling trapped by your debt, and you are struggling to meet your agreed creditor payments, then it’s time to act. Insolvency is not something to be taken lightly, however a statutory debt solution will enable you to become debt free a lot quicker than most other solutions.

IVA and bankruptcy are two popular insolvency solutions as they generally involve a large proportion of debt being written off. There are similarities between these two debt solutions which is why we thought it helpful to compare them and explain what they could mean for you. 

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When is a statutory debt solution right for me?

If you cannot pay your debts as and when the bill is due or if you owe more to creditors than the value of any property you own, then you are by definition ‘insolvent’. In this case a statutory debt solution could be the best route for you.

Both bankruptcy and an IVA are a form of insolvency, which means both of these debt solutions will result in you clearing your unsecured debts. However, both solutions also require some tough decisions and budgeting, and both will affect your credit rating for at least 6 years.

Here’s a quick rundown of the key differences between an IVA and bankruptcy.

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What do they both mean?

An IVA is a debt solution whereby you make affordable payments for an agreed period of time (usually between five and six years). It’s a legally binding agreement between you and your creditors. You will need to draw up a proposal that states how much you can afford to pay your creditors and your creditors will vote on whether to accept this or not (at least 75% in value of the creditors who vote, must vote in favour).

Assuming they approve your proposal and you make your payments as per the agreement you will be clear of any balance remaining on the included debts.  However, if you don’t keep up your agreed payments you could risk the arrangement failing and the possibility of a bankruptcy petition being brought against you.

Bankruptcy involves making an online application which will cost you £680.  If you reside in Northern Ireland the process is slightly different – you will need to fill out forms from the court or insolvency service. Costs also differ for NI residents, you will be expected to pay a £525 Official Receiver’s Fee plus court costs of £127 and a solicitors fee of £7 – £659 in total.

In Bankruptcy, your assets including your home and car may be sold in order to pay your creditors. You may also have to make contributions from your income as part of your bankruptcy order depending on your circumstances. The Official Receiver will gather all information in relation to your financial affairs and assets, directly dealing with your creditors on your behalf. If you have assets, the role of the Official Receiver is usually replaced by an appointed ‘Trustee in Bankruptcy’ who will deal with your affairs instead. Bankruptcy will last until you are discharged, at which point the balance on any of the creditors included in bankruptcy will be written off.

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How long will each take?

Ordinarily bankruptcy is much quicker than an IVA; you will usually be discharged from bankruptcy after 12 months. However you may have to make payments from your income into the bankruptcy for 3 years depending on whether you can afford to do so. Your home may also be sold in bankruptcy if there is equity in the property. 

However, if the Official Receiver or the Trustee in Bankruptcy deems that you have not properly carried out your duties under the bankruptcy proceedings or if you’re found to have acted carelessly or dishonestly you could face the ongoing restrictions of bankruptcy for between 2 and 15 years.

An IVA typically lasts five years – however the arrangement could be extended by 12 months if you have a property and you are unable to release your share of equity for the benefit of your creditors.

Essentially, in bankruptcy you will risk any property or assets but it will be a quicker solution than an IVA.

Will I have to sell my home?

An IVA will not mean you have to sell your home, although you will be required to attempt to re-mortgage if you have equity of £5,000.00 or more. –If you’re unable to re-mortgage your creditors would expect you to contribute more into your IVA because of the property – this is usually satisfied by a 12 month extension of the IVA.

In bankruptcy your home will be sold by the Trustee in Bankruptcy if the proceeds of sale is of benefit to creditors. Of course, if you’re in negative equity then it’s less likely that there will be a forced sale, because it may not benefit anyone. A Trustee in Bankruptcy considers a low value home, which may not be sold as part of the bankruptcy to have equity of £1,000.00 or less. 

What would each mean for my work?

There are some jobs that a Bankrupt would not be legally allowed to hold, including some official positions, some qualified professionals and being a company Director.

However, some workplaces include it as a condition of employment that you cannot become insolvent, which could mean that both an IVA and bankruptcy could affect your ability to keep your job. You should always check to see what being insolvent could mean to any contracts you hold.  

Both an IVA and bankruptcy are matters of public record, so it’s possible for your employer to find out, although IVA notices are not published in newspapers while bankruptcies may be.

How long will they appear on my credit file?

Both bankruptcy and an IVA will remain on your record for 6 years (should an IVA last longer than 6 years it will stay on your record until conclusion). This will affect your ability to take out credit. However, once discharged from bankruptcy or your IVA completes, it allows you to get on with life debt-free. If you have been struggling with debt, this can simply feel like an enormous relief.

What should I do now?

If you feel bankruptcy is inevitable, you should seek independent, qualified advice as it may not be the best or only option available to you.

Here at PayPlan we have highly experienced, compassionate staff, available to offer free debt advice and help you find a solution. Call us today on 0800 280 2816 or request a call back by filling out our debt help form.

We can help you determine the best way to get back in control of your debts, whether that is an IVA, bankruptcy or another option.

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*In the case of a one-off lump sum settlement

More Information on IVAs