How does an IVA compare to bankruptcy?

Many people get confused between IVA’s and bankruptcy – and that’s perfectly understandable as there are certain similarities between the two.  In this article we look at the ways in which IVA’s compare to bankruptcy.

About IVA’s
IVA’s were first introduced by the Insolvency Act 1986 to help businesses with their debt problems.  More recently, however, increasingly more individuals have relied on IVA’s as a means of getting back on track.  In fact, they’re now available to anyone who has unsecured debts in excess of £10,000.00 and ultimately mean that those who qualify for one can get back on track within just a five-year period.  That said, they’re not suitable for everyone and can only be managed by a licensed insolvency practitioner.  They can’t be self-managed.

About Bankruptcy
Bankruptcy can have more serious consequences than IVA.  For example, if you own your own home then you may be required to sell it in order to repay some, or all, of the amount owed to your creditors.  What’s more, certain employment types (such as the police force, armed forces, solicitors and accountants) usually have clauses in their contract of employment stating that bankruptcy could result in their dismissal.  Of course, this in itself, is a very serious consequence and shouldn’t be taken lightly. 

Which is best?
In some cases, creditors can apply for a bankruptcy order regardless of the consequences.  If this happens then it’s advisable to seek advice as soon as possible for the reasons stated above.

If, however, you find yourself having to choose a debt management option then your chosen advisor will be able to advise you on the pro’s and con’s of each option depending on your personal circumstances.  If, for example, you own your home then an IVA might be the better option, although the Individual Voluntary Arrangement might require that you re-mortgage it during the last year of your arrangement to release any equity.  That said, you won’t be required to sell it against your will.

If you’re looking to clear your debts within a shorter period of time then a bankruptcy order will only last for a period of 12 months (as opposed to an IVA which usually lasts for 60 months).

How do I find out more about the consequences of each option?
Before you decide on which route might be best for you it’s advisable to seek independent advice from a licensed insolvency practitioner (‘IP’).  An IP is usually an accountant or a lawyer and will be able to discuss your financial situation in more detail before making appropriate recommendations for you.

In order to assist your advisor, you’ll be asked to provide a full list of your debts, together with details of your income and outgoings.  It’s important to give your advisor as much information as possible so that he or she can determine which of your debts can (or can’t) be incorporated into your chosen debt management plan.  However, given the best advice then there’s certainly no reason why you shouldn’t look forward to a debt-free future regardless of which option you decide to take.

Author – Uday Tank