IVA vs Bankruptcy: What You Need to Know

An Individual Voluntary Arrangement (IVA) and bankruptcy are both formal insolvency solutions used when a person cannot pay their debts. Insolvency means being unable to pay money owed, and both IVAs and bankruptcy are legally binding agreements between the debtor (the person who owes money) and their creditors (those owed money).

Both options can lead to some debts being written off, but they work differently and each has advantages and disadvantages. Debt solutions should always be considered carefully, and it is important to seek expert advice before deciding.

What Is an IVA?

An IVA is a formal agreement between you and your creditors to repay debts over a set period, usually five years. It must be set up and managed by a licensed insolvency practitioner, who charges fees averaging around £5,000. Payments are structured to be affordable based on your income and expenses.

What Is Bankruptcy?

Bankruptcy is a court-approved process that writes off most debts if you cannot pay them back. You can apply for bankruptcy yourself, which costs £680 (£130 adjudicator fee plus £550 deposit). Creditors can also apply to make you bankrupt if you owe them at least £5,000, even if you don’t want to go bankrupt.

How Long Do They Last?

• IVA: Typically lasts five years, provided you keep up with payments and conditions.
• Bankruptcy: Normally ends after 12 months, though you may need to make monthly contributions for up to three years if your income allows.

Impact on Employment

Some jobs and professional memberships restrict people from being insolvent. Roles most commonly affected include:

• Company directors
• Law and property professions
• Financial and accountancy roles
• Licensed trade (e.g. pub licensees)

Always check your contract and professional body if you are concerned about career restrictions.

Impact on Your Home

If You Rent:

• IVA – Renting is usually unaffected, although your landlord may check for affordability.
• Bankruptcy – You can usually stay in your home, but some tenancy agreements contain clauses allowing landlords to evict tenants who go bankrupt.

If You Own Your Home:

• IVA – You won’t usually have to sell your home, but if you have more than £5,000 in equity, you may be asked to remortgage near the end of the IVA. If this isn’t possible, your IVA may be extended by 12 months.
• Bankruptcy – You may have to sell your home to repay debts, although homes with less than £1,000 in equity are considered low value and are less likely to be sold.

Pros of IVA

• Repayments are based on what you can afford.
• You don’t usually have to sell your home.
• Legal action from creditors stops once the IVA is in place.
• Interest on included debts is frozen.
• You will be debt free after completing the IVA.
• Helps avoid bankruptcy.

Cons of IVA

• Creditors must approve the IVA, so it isn’t guaranteed.
• Budgets are often tight, with little financial flexibility.
• Remains on your credit file for six years (or longer if the IVA exceeds six years).
• Details are recorded publicly on the Insolvency Register.
• Fees are payable to the insolvency practitioner.
• Some debts cannot be included (e.g. court fines, student loans).
• You may have to sell high-value assets.
• In some cases, you may pay more back than under bankruptcy.

Pros of Bankruptcy

• Full discharge of most debts after just 12 months.
• Creditors stop contact and legal action.
• Some assets, such as basic household goods and reasonable living expenses, are protected.
• No need to negotiate with creditors directly.
• Debts not secured against property are usually written off.

Cons of Bankruptcy

• If your income is high enough, you may have to make contributions for three years.
• Control of assets is handed to the Official Receiver or trustee.
• Your bank account may be temporarily frozen.
• You may lose your home.
• Some professions may not allow bankrupt individuals to continue working.
• Bankruptcy is recorded publicly.
• Pension savings can, in some cases, be accessed by the trustee to repay debts.

Choosing Between IVA and Bankruptcy

The choice between an IVA and bankruptcy depends on your income, assets, home ownership, profession, and long-term goals. Both can provide a route out of unmanageable debt, but the impact on your job, property, and finances is different. Always seek independent debt advice before making a decision.