Being made bankrupt or applying for an Individual Voluntary Arrangement has a tremendous impact on an individual’s personal finances. While there are advantages to each option, these should be entered into with as much knowledge as possible. Get professional debt advice from an organisation such as Harrington Brooks.

There are other debt solutions such as debt management or a debt consolidation loan to consider. Whether you apply for an IVA or bankruptcy, you should understand it may affect your long-term financial status.

Advantages to IVAs

An IVA is typically a fixed term five year repayment plan, whereby you only pay into your IVA what you can afford to each month and whatever is unpaid at the end of the fixed term is written off by your creditors. Because an IVA is a legally binding agreement with your creditors, they cannot apply interest or other charges to your debt and should not contact you regarding your IVA payments.

One major advantage of an IVA is that, unlike during bankruptcy, there may be no need for you to sell your assets, such as your home. Indeed, an IVA can protect you assets, providing you continue to make your payments.

Unlike bankruptcies, IVAs do not have a negative image. Should you apply for an IVA, it is not advertised in a newspaper nor do you need to notify your landlord or employer about the changes to your financial status. This means your career would not be threatened should you be employed in the armed forces or if you practice a profession that frowns on bankruptcies. These types of professions include positions where you may handle money, such as, some shops, some banks, and even the postal services among others. Bankrupts are not allowed by law to act as Company Directors. Always check your contract of employment to determine what you current employer will do if you were to be made bankrupt, and discuss with your insolvency practitioner your future career prospects.

You would have a better chance of receiving most types of credit at the end of the IVA period.

Though five years is a long time to repay debts, it does have some advantages to you: Your spending habits should change and you do not incur fresh debt for that period. You also hold onto your house and your job, which is perhaps the best benefit.

The costs of an IVA are normally lower than with a bankruptcy, which means creditors may receive bigger payments from the debtors. Creditors may also claim tax relief against bad debts, as with bankruptcy.

It is a legally binding agreement so both creditor and debtor are bound by the rules.

Disadvantages to IVAs

IVAs normally last five years and are mostly suited to individuals with unsecured debts of at least £12,000. It is a big commitment and it requires individuals to make regular payments.

A debtor’s house and other assets might be at risk. The terms of your IVA may include a provision to realise the value, in part or in total, of some of your assets. However, in reality, an IVA actually protects your assets, particularly your home.

IVAs are not failure-free. There is always the risk involved that it may fail because payments are not maintained, and then the debtor could be made bankrupt.

While this is more an advantage than anything else, some people may think the embargo on taking out further credit is a disadvantage. The IVA stays on a debtor’s credit file for one year after the successful conclusion. This may make it a bit more difficult to get further credit straight away.

How does Bankruptcy differ from an IVA?

Bankruptcy should not be thought of as a ‘soft option’. There are many disadvantages to it, though it is a welcome relief to others who would not benefit from an IVA.

  • A bankruptcy does not last as long as an IVA.
  • Bankrupts could be rehabilitated in as little as one year and all their debts would be cleared. However if you have disposable income you may still be asked to make payments for three years as opposed to five years for an IVA.
  • Should you be made bankrupt, you would normally lose control over your assets and there is a chance that you would lose your house. Providing that you complete your IVA, you home should be protected in an IVA.

Young people may benefit more by applying to be made bankrupt, especially if they do not have many assets. Those who do not own their home, do not worry about the perceived stigma of bankruptcy, or those who are in a job that would not penalise them for being bankrupt, may be better candidates for it.