IVA v Bankruptcy

There are many people who face this question every day. Credit cards build up, interest rates and costs go up, but income is not getting any higher. Meanwhile, TV adverts bombard us with advice to enter into a voluntary arrangement. But is this the best option?

An Individual Voluntary Arrangement (IVA) is an agreement with your creditors to pay them back a percentage of what you owe them, over a period of time. An insolvency practitioner is appointed to supervise the receipt and distribution of the money. 

It is usual to make contributions from your income over a period of around five years. Part of those payments are used to pay the costs of your supervisor, so it is not a free exercise. 

It also needs the approval of at least 75 per cent (in value) of your creditors.

They will often not agree to an IVA if you have a reasonably high level of equity in your house, for example – they could access this asset through bankruptcy either to get payment quicker or get a higher payment. 

Many of the TV adverts suggest that you can write off 75-90 per cent of your debts. My experience is that banks and other financiers will often only agree to a maximum 60 per cent reduction.

The advantage of an IVA is that you can hold onto assets such as your car and house, which you may lose in a bankruptcy, but you will need a regular income and/or an injection of cash from somewhere.

If you owe more than £750 and have the fee of around £500, then you can make yourself bankrupt. This immediately wipes out your debts, frees you from responsibility once the bankruptcy is finalised and you will normally get an automatic discharge from bankruptcy after just one year.

However, all your assets vest in your trustee in bankruptcy and the trustee can sell them to raise funds to pay your creditors.

The details of your IVA or bankruptcy order are put onto the Individual Insolvency Register of the Government Insolvency Services in the same way.

In summary, if you have no or little income, a bankruptcy order is probably the best choice. If you have few disposable assets but sufficient income then an IVA may be the best choice.