What are the differences between Bankruptcy and an IVA?

October 26, 2018

Although bankruptcy and IVA are formal insolvency procedures and carry certain similarities, there are major differences between the two. Individual Voluntary Arrangements were, in fact, introduced by the government as an alternative to bankruptcy, so what are the areas of difference between them?

Duration

An IVA generally lasts for five or six years. You make monthly payments according to the agreement for five years, and may need to contribute for a further 12 months if you’re not a property owner or can’t release sufficient equity from your property in year five.

Bankruptcy carries a shorter duration – if you meet all the terms of the bankruptcy order you can be discharged in 12 months. You may be required to make contributions from your income via an Income Payments Agreement (IPA) or an Income Payments Order (IPO), however, for a further two or three years.

Reliance on income

IVAs rely on the monthly contributions made from a debtor’s surplus income. If you have no residual income once essential living expenses have been deducted, it’s unlikely you’ll be eligible to enter into an IVA.

Bankruptcy, on the other hand, doesn’t necessarily involve making monthly payments in this way. You hand over all your assets to the Trustee, and it depends on your circumstances whether you’ll be required to contribute further to creditor returns.

Fees

The costs of an IVA are factored into your monthly repayments and deducted over the course of the agreement. Bankruptcy requires full payment of fees before you can apply, and is currently £680 in England and Wales. It’s possible to pay by instalments, but you can only make your application when the fee has been paid in full.

Creditor returns

Both IVA and bankruptcy involve writing off the debts that remain at the end of the process, but the nature of bankruptcy means that creditors sometimes receive lower returns. If you’re unable to make monthly payments in addition to contributing funds generated from the sale of your assets, or perhaps only contribute for a short time, a lower proportion of your debt will be repaid than if you were in an IVA.

Loss of home

Loss of home is an important factor when choosing between an IVA and bankruptcy. Although IVA terms may require you to release equity in your home via a remortgage during year five, it’s less likely that you’ll need to sell your property than if you declared bankruptcy.

Employment

Depending on your job, employment can be affected by both an IVA and bankruptcy. Both processes are recorded in the Individual Insolvency Register which can be publicly viewed, but bankruptcy receives additional publicity in The Gazette. This means there’s more opportunity for your employer to find out about your financial situation, and if it’s a condition of employment that you don’t become insolvent, you could lose your job.

Entering bankruptcy has further restrictions that could affect your career. You won’t be able to become a limited company director, or fulfil certain official roles such as local councillor or school governor.

IVAs and bankruptcy are legally binding insolvency procedures and both have specific benefits and drawbacks depending on individual circumstances, so it’s important to carefully consider your options prior to proceeding.

UK Debt are insolvency specialists and can help if you’re struggling with unmanageable debt. We’ll carefully assess your financial situation and establish your best options. Please call one of our expert team to arrange a free same-day meeting to discuss your needs.

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