Did you know that money worries are one of the biggest causes...
Bankruptcy: The differences between bankruptcy and an IVA
UPDATE 5 April 2016: This article was originally published in December 2011. The bankruptcy application process for people living in England, Wales and Northern Ireland is changing in 2016. Visit our bankruptcy changes page for more information on the new application process and fees for England and Wales residents. Changes for Northern Ireland residents will come into effect in November 2016.
This page contains information about debt solutions available in England, Wales and Northern Ireland. Debt advice in Scotland involves similar but different solutions. Before considering an IVA as a debt solution, please make sure you fully understand the risks involved when entering an IVA. You can also find more detailed information about bankruptcy on our website.
This week we’re investigating bankruptcy, to tie in with our new guide to personal bankruptcy. Today we’re looking at the differences between bankruptcy and an IVA.
Bankruptcy and an individual voluntary arrangement (IVA) are both forms of insolvency.
They are both legal processes and if listed on a credit file look pretty much the same.
So you now know two things they have in common; what are the other similarities, and, more importantly, what are the differences?
- An IVA usually lasts five to six years. In bankruptcy you would normally be discharged after 12 months, although you could be expected to pay into the bankruptcy for three years.
- In an IVA you would need a healthy surplus income (usually £100+) that you would be expected to pay into the arrangement for the benefit of creditors. To go bankrupt you don’t need to have any surplus income.
- Both bankruptcy and IVAs have charges or costs associated with them. In an IVA a percentage (agreed by creditors) of the monthly amount that you pay into the arrangement (once approved) will go to towards the Nominee and Supervisory fees associated with the IVA. In bankruptcy you have to pay deposit before you can go bankrupt, plus court fees, although these may be waived if you are in receipt of certain benefits.
- With bankruptcy it’s best to take some free and impartial debt advice to make sure it’s your best option before you petition (we have a specialist bankruptcy team that can do this for free). Once you’ve made that decision you go to the court and petition for bankruptcy in person. You’d normally see a judge, although this wouldn’t be done in a court room. Some companies offer ‘assisted bankruptcy’ services where they charge an upfront fee for completion of the court paperwork; we offer this service free of charge.
- In an IVA you work with a licensed Insolvency Practitioner. The insolvency practitioner would first act as Nominee and then, once your IVA is approved, as Supervisor of the arrangement. The fees from this are taken from the amounts paid into the arrangement at the agreement of creditors.
- All IVAs are unique to the circumstances of the individual(s) involved but they are often recommended when the people concerned own a property or have assets they wish to protect. There is a common misconception that if you go bankrupt that you will lose any property you own. If the property you own is in negative equity you may find that you’ll be allowed to retain this.
- Both bankruptcy and IVAs can have an effect on some forms of employment. You’d be best advised to check the terms and conditions of your contract or position before looking at either solution.
- Both bankruptcy and IVAs are listed on the publically-searchable insolvency register.
- Both will be on your credit file for six years.
- In bankruptcy you might have your accounts frozen for a period of time; in an IVA you may need to open another basic bank account with an unconnected creditor.
- Once you have petitioned for your bankruptcy you will be in the hands of the official receiver – it can be difficult and very expensive to reverse or ‘annul’ the bankruptcy afterwards if you change your find. They’ll have full access to all bank accounts and any financial transactions.
- In an IVA, if you have a change of circumstances and you can no longer pay anything into it, you could find that the IVA breaches and fails. You may then be left with little alternative but to petition for bankruptcy in order to resolve your problem debt.