If you are drowning in debt problems and looking for a debt solution that will let you get back to living your life, then you may be considering applying for an Individual Voluntary Arrangement (IVA) or filing for bankruptcy.

As formal debt solutions, there’s lots of commonalities between both IVAs and bankruptcy, as well as some key differences. One arrangement may be more suited to your situation than the other, you just need to figure out which. That’s what we will help with in this article.

What is an Individual Voluntary Arrangement (IVA)?

Individual Voluntary Arrangements are legally binding agreements between debtors (people in debt) and their creditors (the people they owe money to) to repay their debts over a fixed amount of time.

IVAs are available in England, Wales, and Northern Ireland, and most last five years – yours may be extended to six years if you have a home and cannot remortgage it. If you do own a property, IVAs allow you to keep it, rather than selling the property and giving the proceeds to creditors.

The arrangement is set up by an Insolvency Practitioner (IP), a licensed debt professional authorised and regulated by the Financial Conduct Authority (FCA). With the arrangement, you will agree an amount of money you can afford to pay towards your unsecured debts each month, and at the end of the IVA, any remaining debt will be written off.

What is bankruptcy?

Bankruptcy is a formal debt solution available in England and Wales, as well as Northern Ireland. It is aimed at people who carry a level of debt they feel unable to repay in a reasonable amount of time. The process is usually completed in 12 months, but can last as long as three years.

To go bankrupt is to pursue a financial fresh start. You must hand over any property, assets, or equity you hold. Your bank accounts will be monitored and, aside from living expenses, everything you have will go to your creditors.

Bankruptcy doesn’t involve Insolvency Practitioners, and is instead overseen by an official receiver. They work on behalf of the Insolvency Service, and will monitor your financial situation and manage processes associated with your bankruptcy. At the end of the bankruptcy process, your debts will be wiped and you’ll be free to start again.

Is bankruptcy a bad solution?

You have to ‘declare’ bankruptcy, which means going bankrupt is a choice – the chance for a new beginning.  There is an unfortunate stigma attached to going bankrupt, but there is nothing inherently ‘bad’ about it. It may be exactly the debt solution you need to move forward with your life.

If you choose to go bankrupt, however, you need to make sure you understand the risks. The process will have a serious impact on your credit rating and stay on your credit file for six years. Under a bankruptcy order, you can’t be the director of a limited company, and you may find it difficult to keep certain jobs.

Will I lose my home with an IVA or bankruptcy?

Bankruptcy for homeowners

This is one of the main differences between an IVA and bankruptcy. The official receiver has two years and three months from the date your bankruptcy was approved to decided what do with equity in your home. If you own significant equity and go bankrupt, you may be forced to sell it and vacate.

If you do not own significant equity, or have negative equity, losing your home is less likely, but still possible. The same applies if you own a vehicle or any other assets with a high value.  If you declare bankruptcy, you’ll have to sell them to pay off your debts.

IVAs for homeowners

While both an IVA and bankruptcy carry implications for homeowners, with an IVA, you don’t need to worry about losing your home.

If you choose an IVA, you may be asked to remortgage the property when you are about six months out from the end of the agreement in order to help pay off your debts.  If you can’t afford this, you can choose to keep making payments to your creditors for an additional 12 months.

Will I lose my business with an IVA or bankruptcy?

Bankruptcy for business owners

This is another situation where you may want to consider an IVA over bankruptcy.  Your business will be shut down if you declare bankruptcy. Any assets your business holds will be handed over to the official receiver, and they will decide what to do with the lump sum raised.

Whether this is a big deal or not depends on what you do and what types of assets are associated with your business.  If, for example, you are self-employed as a virtual assistant and work out of your home office, you may have no major issues starting over, and bankruptcy may work fine.

IVAs for business owners

An IVA may be a better solution for business owners. Unlike with bankruptcy, your Insolvency Practitioner will have no claim over you company or assets if you decide on an IVA.

Your business will be able to continue trading, your business bank account will remain open, and an IVA allows company directors to remain in their position – so long as you both keep up with payments and continue to take your Insolvency Practitioner’s advice.

Will bankruptcy or an IVA affect your job?

How an IVA impacts employment

A lot of people worry that they will lose their job if someone at work finds out they are insolvent.  With an IVA, this is very unlikely.

Although an IVA is a form of insolvency, and will be detailed on the public Insolvency Register, you will not be forced to disclose that information to employers, and it is highly unlikely anyone but your creditors and future lenders will check the Insolvency Register.

How bankruptcy impacts employment

If you are an MP or company director, you may be prohibited from holding your position while bankrupt.  There are also other professions where you may not be able to practice.  Some examples include solicitor, accountant, estate agent, dentist, doctor, and financial advisor.

Unless you have an occupation like those above, there is no reason to avoid bankruptcy due to employment concerns.  If you are worried, you may wish to speak to an experienced debt relief agent for advice. You can also consult with your HR department.

Is bankruptcy better than an IVA?

If you do not have much in the way of spare income, you may want to consider bankruptcy over an IVA.  With an IVA, you will have to make higher payments each month, and in fact with bankruptcy you may not have to make any at all.  Bankruptcy does unfortunately carry higher fees, but if you choose an IVA for that reason, it may seem easier now, but you will have a rough five years ahead of you.

So now let’s take a moment to sum it up.

Consider Choosing an IVA When …

  • You own a home, vehicle, or other assets you can’t bear to lose.
  • You own your own business and the requirement that you start over with a bankruptcy would cost you your livelihood.
  • You have a job which you may lose if you declare bankruptcy.
  • You have power of attorney or are applying for it.

Consider Choosing Bankruptcy When …

  • You have no important assets you are afraid to lose.
  • You either work for someone else or you are self-employed with a business that is easy to restart.
  • You have a job you are not afraid of losing (most jobs are secure even with bankruptcy).
  • You don’t have a lot in the way of spare income, or your situation is highly unstable.
  • You want things to be over fast so you can start over as quickly as possible.

Need help choosing between insolvency solutions?

Now you should have most of the information you need to gauge whether a bankruptcy or an IVA would make more sense for your situation. Still, insolvency solutions are complex, and it’s smart to get some professional debt advice before you move forward.

IVA Plan may be able to help. We specialise in debt solutions available in England and Wales, and Northern Ireland. Our advisers have in-depth knowledge of both the IVA and bankruptcy processes, and will use your financial information to help you choose the debt solution that’s right for you.

For expert help, debt advice, and information on how to keep your creditors at bay, visit the IVA website – or give us a call. The phone number is [NUMBER]. We can help you take the first step towards financial freedom today.