Bankruptcy vs. IVA

Attribute	Bankruptcy	IVA
Definition	Legal process where an individual or business is declared unable to repay their debts	Agreement between an individual and their creditors to repay debts over a set period
Eligibility	Available to individuals and businesses	Available to individuals only
Duration	Typically lasts for 12 months, but can be longer	Usually lasts for 5-6 years
Impact on Credit Rating	Severely affects credit rating for several years	Affects credit rating, but less severe than bankruptcy
Assets	May be sold to repay debts	Not required to sell assets
Debt Repayment	Debts are usually written off, but some may need to be repaid	Debts are repaid in full or partially over the agreed period
Public Record	Publicly available information	Not publicly available

Introduction

When faced with overwhelming debt, individuals often seek solutions to regain control of their financial situation. Two common options are bankruptcy and an Individual Voluntary Arrangement (IVA). While both provide a way to address debt problems, they differ significantly in their attributes and implications. In this article, we will explore the key differences between bankruptcy and IVA, helping you understand which option may be more suitable for your specific circumstances.

Eligibility and Process

Bankruptcy is a legal process available to individuals and businesses who are unable to repay their debts. It can be initiated by the debtor or by creditors through a court order. In contrast, an IVA is a formal agreement between the debtor and their creditors, facilitated by a licensed insolvency practitioner.

To file for bankruptcy, an individual must owe at least £5,000 in debt and be unable to meet their financial obligations. The process involves submitting a bankruptcy petition to the court, which will then appoint a trustee to manage the debtor's assets and distribute them among the creditors. Bankruptcy typically lasts for one year, after which the debtor is discharged from most of their debts.

An IVA, on the other hand, requires a minimum debt of £6,000 and is suitable for individuals with a regular income. The debtor proposes a repayment plan to their creditors, outlining how much they can afford to pay each month. If approved by creditors representing at least 75% of the debt value, the IVA becomes legally binding. The debtor makes regular payments to the insolvency practitioner, who then distributes the funds among the creditors. An IVA usually lasts for five to six years, after which any remaining debt is written off.

Impact on Credit Rating

One of the most significant concerns for individuals considering bankruptcy or an IVA is the impact on their credit rating. Bankruptcy is a severe form of insolvency and will have a severe negative impact on creditworthiness. It will remain on the individual's credit file for six years, making it challenging to obtain credit during that period. Even after the bankruptcy is discharged, it may still affect future borrowing opportunities.

An IVA, while still having a negative impact on credit rating, is generally considered less severe than bankruptcy. It will also remain on the credit file for six years, but the debtor may find it easier to rebuild their creditworthiness during and after the IVA period. By making regular payments and demonstrating responsible financial behavior, individuals can gradually improve their credit score.

Assets and Property

When it comes to assets and property, bankruptcy and IVA also differ in their treatment. In bankruptcy, the debtor's assets, including their home, may be sold to repay creditors. However, certain assets are protected under bankruptcy law, such as essential household items and tools necessary for employment. If the debtor has significant equity in their home, it may be at risk of being sold to satisfy the debts.

In an IVA, the debtor is not required to sell their assets. They can retain ownership of their home and other possessions, provided they continue to make the agreed-upon payments. This aspect of an IVA often makes it a more attractive option for individuals who wish to protect their assets while still addressing their debt problems.

Publicity and Stigma

Bankruptcy is a public process, and details of the bankruptcy order are published in the Individual Insolvency Register. This means that bankruptcy is more likely to be noticed by friends, family, and potential employers. The stigma associated with bankruptcy can have social and professional implications, potentially affecting future job prospects and personal relationships.

An IVA, on the other hand, is a private agreement between the debtor and their creditors. It is not publicly advertised, and therefore, the stigma associated with bankruptcy is generally avoided. This confidentiality can be appealing to individuals who wish to maintain their privacy and minimize the impact on their personal and professional life.

Flexibility and Control

Bankruptcy is a relatively rigid process, with the trustee having significant control over the debtor's financial affairs. The trustee will assess the debtor's income and expenses, potentially requiring them to make additional payments if their income exceeds certain thresholds. The debtor may also be required to contribute towards their bankruptcy estate for up to three years.

An IVA, on the other hand, offers more flexibility and control to the debtor. They have the opportunity to propose a repayment plan that suits their financial situation, and as long as they adhere to the agreed-upon terms, they can maintain control over their income and assets. This flexibility can be particularly beneficial for individuals with irregular income or those who wish to protect specific assets.

Conclusion

Bankruptcy and IVA are both viable options for individuals struggling with debt, but they have distinct attributes and implications. Bankruptcy provides a fresh start after a relatively short period, but it comes with severe consequences for credit rating and potential asset loss. On the other hand, an IVA offers more flexibility, allows individuals to retain their assets, and may have a less severe impact on creditworthiness. Ultimately, the choice between bankruptcy and IVA depends on the individual's specific circumstances, financial goals, and preferences. Seeking professional advice from an insolvency practitioner or financial advisor is crucial to make an informed decision and navigate the path towards a debt-free future.