Difference Between IVA and Bankruptcy: Which Option is Right for You?

Is an IVA the same as bankruptcy? Are you struggling to choose between an Individual Voluntary Arrangement (IVA) and declaring bankruptcy? Both could help manage overwhelming debt in England, Northern Ireland, and Wales, but they have significant differences that can impact your financial future. 

So, which is the right choice for you? This guide will help you understand the key differences between IVA and bankruptcy, empowering you to make an informed decision.

What is an IVA?

An Individual Voluntary Arrangement, or IVA, is a formal agreement between you and your creditors that allows you to repay your debts over an agreed period, typically about five years. 

The main purpose of an IVA is to create an affordable repayment plan for those facing financial difficulties while protecting your assets from being taken by creditors. 

Unlike bankruptcy, which often involves the sale of assets, an IVA is designed to let you keep your property while making payments based on your specific financial situation.

Process Involved in Setting Up an IVA

Establishing an IVA involves several essential steps:

1. Consultation: The process starts with a consultation with a licensed Insolvency Practitioner (IP). The IP will review your financial situation, including income, expenses, and debts. They will then determine if an IVA is the best option for you or if an alternative, such as bankruptcy, may be more appropriate.
2. Proposal Preparation: The IP will draft a proposal detailing your financial status and suggesting an affordable repayment plan. You must provide documents such as bank statements and payslips for this
3. Creditor Meeting: Once the proposal is ready, it is sent to your creditors, who will vote on its terms during a virtual meeting. Generally, creditors holding at least 75% of your debt (by value) must agree to the proposed terms for your IVA to get approved.
4. Approval and Implementation: If your creditors approve the proposal, the IVA becomes legally binding. From this point, creditors can no longer pursue any debts in the arrangement. Your IP will monitor the IVA, ensuring payments are made on time.
5. Completion: Once you complete the IVA term, usually after five years, any remaining unsecured debts might be written off depending on the terms of the agreement.

Duration and Payment Structure

An IVA typically lasts three to five years, depending on your payment structure. Your IP calculates a reasonable monthly payment that aligns with your disposable income. If your income or expenses change significantly during the IVA, you could request a payment adjustment by informing your IP.

Impact on Assets and Property

One of the main advantages of an IVA is that it allows you to retain ownership of your assets, including your home, as long as you comply with the payment requirements. 

If there is equity in your property, it may need to be addressed in the final year of the IVA by releasing some equity if feasible. Overall, an IVA helps you manage your debt without losing valuable assets.

Employment Implications

An IVA typically does not impact your employment status, though certain jobs, especially in finance or specific directorships, may have policies regarding insolvency. 

You might need to inform your employer about your IVA, or there could be restrictions depending on your role. It’s wise to review how an IVA might affect your job and career plans before deciding.

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What is Bankruptcy?

Bankruptcy is a legal process available for individuals or entities unable to repay their debts. The primary goal of bankruptcy is to offer a fresh start by eliminating debts or establishing a structured repayment plan. Bankruptcy is initiated by either you or your creditors through a court order.

Process Involved in Declaring Bankruptcy

Declaring bankruptcy involves several key steps:

1. Assessment of Financial Situation: Before choosing bankruptcy, you must evaluate your financial situation and consider alternatives like an IVA or a debt management plan. Consulting with a financial advisor or an insolvency practitioner would help clarify the best option.
2. Filing a Petition: To initiate the bankruptcy process, you must file a petition with the relevant court, detailing your debts, assets, income, and expenses. In some regions, this process can be done online.
3. Bankruptcy Order: If the court approves, it issues a bankruptcy order, officially declaring you bankrupt. A trustee is appointed to manage your case, oversee asset liquidation, and ensure creditors are paid fairly.
4. Asset Liquidation: The trustee will assess and sell non-exempt assets to repay creditors. Basic household goods and essential work tools may be exempt from liquidation.
5. Discharge from Bankruptcy: Bankruptcy typically lasts about 12 months. After this period, if you meet all conditions, you might be discharged from bankruptcy, freeing you from most debts.

Duration and Potential for Asset Liquidation

Bankruptcy generally lasts around 12 months but can vary based on individual circumstances and regional regulations. During this period, the trustee may sell non-exempt assets to pay creditors. This includes your home, car, or investments unless they are deemed essential for living or work.

Impact on Credit Rating and Financial Future

Bankruptcy has a significant effect on your credit rating and can remain on your credit report for up to six years. This could make borrowing money difficult and may result in higher interest rates on any loans you obtain. 

While bankruptcy offers relief from current debts, it could make accessing credit challenging as lenders often view individuals who have declared bankruptcy as high-risk borrowers. However, after discharge, you could work on rebuilding your credit by managing your finances responsibly.

Employment Restrictions Associated with Bankruptcy

Declaring bankruptcy may not prevent you from getting a job, but it could lead to certain restrictions, especially in specific professions:

• People in financial, legal, or public service roles may face limitations or need to disclose their bankruptcy status to their employer.
• Company directors may be disqualified from their roles while bankrupt.
• A bankruptcy declaration could impact certain professional licenses, especially in fields like finance or insurance. For example, individuals may face restrictions or disqualification from holding licenses in these industries. It’s important to check with your professional licensing body to understand the specific implications of bankruptcy on your license.

Now you have a clear idea about IVA and bankruptcy, let’s discuss the key difference between an IVA and bankruptcy. 

Key Difference Between IVA and Bankruptcy  

We’ll explore the difference between IVA and bankruptcy in detail. 

1. Duration of Process

Bankruptcy typically lasts around 12 months, with most debts discharged at the end of this period. However, if you have surplus income, you may need to make payments for up to three additional years under an Income Payment Agreement (IPA). An IVA, on the other hand, generally lasts between five to six years, requiring regular payments throughout.

2. Asset Management

In an IVA, you might be able to retain ownership of your assets, such as your home and car. However, equity release terms—such as contributing property equity if it exceeds a certain threshold—depend on the specific IVA proposal and creditor agreement. It’s important to consult your Insolvency Practitioner (IP) for tailored advice.

In contrast, bankruptcy places most of your assets under the control of a trustee, who may sell them to repay creditors. This could include your family home if there is sufficient equity.

3. Financial Contributions

An IVA requires regular monthly payments based on your disposable income after essential living expenses. If your income increases during the IVA term, your payments may also increase. In bankruptcy, regular payments are only required if you have surplus income. If so, you may be subject to an IPA for up to three years, but this is not guaranteed for all bankruptcies.

4. Credit Impact

IVA and bankruptcy remain on your credit report for six years from the start date. While both negatively impact your credit score, bankruptcy tends to have more severe immediate consequences due to its public nature and potential implications on future borrowing.

5. Employment Restrictions

Bankruptcy could impose stricter employment restrictions than an IVA. Individuals in certain roles, like company directors or those in finance, may face disqualification or mandatory disclosure of their bankruptcy status. An IVA typically does not have these stringent restrictions, though it may still impact specific professions.

Similarities Between IVA and Bankruptcy

Below are the similarities between an IVA and bankruptcy. 

1. Both Are Formal Debt Solutions Recognized by Law

An IVA and bankruptcy are formal, legal processes designed to help you manage debt. An IVA is a binding agreement between you and your creditors, while bankruptcy is a court order to discharge debts. Both processes offer legal protection from creditor actions once initiated.

2. Both Provide a Means to Write Off Debts After a Certain Period

After you complete an IVA, typically lasting five to six years, any remaining unsecured debts might be written off depending on the IVA agreement terms.

In bankruptcy, most debts are discharged after approximately 12 months, though payments from surplus income may continue for up to three years. Both solutions allow you to start anew after the designated period.

3. Public Record Implications for Both Options

Details of an IVA are recorded in the Individual Insolvency Register, which is accessible to the public. However, unlike bankruptcy, IVA information is not actively published in the same way, such as in the London Gazette. Bankruptcy notices, on the other hand, are published in the London Gazette, increasing their public visibility. Both IVA and bankruptcy may affect your credit report for six years from the start date, impacting your creditworthiness.

Now that you have a clearer understanding of the differences between an IVA and bankruptcy, let’s explore the pros and cons of each.

IVA Vs. Bankruptcy: Pros and Cons 

IVA and bankruptcy have their pros and cons. The right debt solution depends on your situation. I’ve listed down the pros and cons here: 

Pros of IVA

• You can keep your property and assets.
• Payments are structured based on disposable income, making them manageable.
• Any remaining unsecured debts are written off after completing the IVA term.

Cons of IVA

• The process is lengthy, lasting several years.
• You may need to release equity from your home, which could impact your finances.
• Payments reduce disposable income, affecting lifestyle.

Pros of Bankruptcy

• Most debts are discharged within about 12 months.
• Provides a fresh start to rebuild finances.

Cons of Bankruptcy

• Assets may be sold to repay creditors.
• Public disclosure can impact reputation and borrowing ability.

Conclusion

Choosing between an IVA and bankruptcy is a significant decision that could shape your financial future. Both options are helpful in managing debts, yet they differ in duration, asset management, and long-term impacts. 

By consulting an FCA-regulated debt advisor or licensed Insolvency Practitioner (IP), you could ensure the best choice for your circumstances. Whether you opt for the structured repayment plan of an IVA or the quicker discharge offered by bankruptcy, taking action is essential for reclaiming your financial stability.

Key Points 

1. The bankruptcy process typically lasts around 12 months, while an IVA generally takes five to six years to complete.
2. In an IVA, you usually retain ownership of your assets, whereas bankruptcy may involve liquidating non-exempt assets to repay creditors.
3. After completing an IVA, any remaining unsecured debts might be written off subjecting to the agreement terms, similar to how most debts could be discharged in bankruptcy after a year.
4. IVAs require regular monthly payments based on disposable income, while bankruptcy may not impose such obligations unless there’s surplus income.
5. Both options may remain on your credit file for six years from the start date, but bankruptcy is more publicly visible and may affect your creditworthiness more severely.
6. IVAs and bankruptcy are both recorded publicly, but bankruptcy notices appear in the London Gazette, increasing scrutiny.
7. Bankruptcy may restrict individuals from holding certain jobs or directorships, whereas IVAs generally have fewer employment-related restrictions.
8. In an IVA, you might need to release equity from your home if it exceeds a certain amount; in bankruptcy, your home could be sold if it has significant equity.
9. Seeking advice from a financial advisor is crucial before deciding between an IVA and bankruptcy to explore all available options.
10. Both IVA and bankruptcy might  provide relief from debts, but they impact future borrowing and financial opportunities differently, requiring careful consideration of your long-term goals.

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