IVA vs Bankruptcy: Which Debt Solution Fits You the Most?

In the world of financial challenges, debt is a significant problem that affects many lives. It grows over time due to interest rates and missed payments, becoming increasingly difficult to manage. Some may feel trapped in this situation, unsure of how to proceed. 

However, there are options available to help navigate through these difficulties: Individual Voluntary Arrangements (IVA) and bankruptcy.

• IVA, managed by specific companies, enable individuals to negotiate with their creditors, repaying what they can afford while safeguarding their assets. 
• On the other hand, bankruptcy provides a more extreme solution, offering a fresh start but at a considerable cost.

Debt poses serious threats, impacting financial stability and mental well-being. Yet, with the right approach—whether through exploring IVA or contemplating bankruptcy—one can overcome these challenges and move towards a debt-free future. 

Don’t worry. We’ve got you covered. With this article, you will be able to learn about IVA and Bankruptcy in order to make an informed decision.

So, without further waiting, let’s get started…

What is an Individual Voluntary Arrangement (IVA)?

An Individual Voluntary Arrangement (IVA) is a formal and legally binding agreement between an individual and their creditors, overseen by the court. It outlines a structured plan for repaying debts over a specified period, typically lasting around five years. The debtor makes affordable monthly payments based on their financial capabilities. 

At the end of the agreed-upon term, any remaining unpaid debt is usually written off.

IVAs are popular among individuals in debt in the UK due to their flexibility and the protection they offer to assets. An Insolvency Practitioner (IP) plays a crucial role in managing the IVA process, handling negotiations with creditors, and ensuring fair treatment of the debtor. The IP also assists in creating the initial proposal for the IVA and provides ongoing support throughout its duration.

However, IVAs are not suitable for everyone as this programme comes with risks. One of the main risks a participant has to manage is they must adhere to strict financial guidelines during the IVA period, often limiting spending to essentials. 

Additionally, IVAs significantly impact credit scores, remaining on credit files for six years after initiation. This can make it challenging to access credit during and after the IVA period, affecting financial opportunities for an extended period.

How Does an Individual Voluntary Arrangement (IVA) Affect Your Debt and Financial Life?

An Individual Voluntary Arrangement (IVA) can significantly impact your debt and financial life. 

Pros: the positive side, 

1. It consolidates your debts into manageable monthly payments, 
2. Protects your assets from seizure by creditors, 
3. Provides legal protection against further actions from creditors once approved. 
4. It also offers a structured approach to financial management, helping you regain control over your finances. 

Cons: there are downsides to consider. 

1. Entering into an IVA negatively affects your credit score, limiting access to credit for the duration of the arrangement and beyond. 
2. It requires a long-term commitment, typically lasting five to six years, which may restrict your financial flexibility. 
3. Failure to adhere to the IVA’s terms can lead to bankruptcy proceedings and additional financial strain. 
4. Additionally, there are costs associated with setting up and managing an IVA, including fees charged by the Insolvency Practitioner, which can impact the overall repayment process. 

It’s crucial to weigh these pros and cons carefully and seek professional advice before deciding if an IVA is the right solution for your debt situation.

How Does Bankruptcy Work?

Bankruptcy is a legal process aimed at aiding individuals or businesses struggling with overwhelming debt. It typically begins with a comprehensive evaluation of the debtor’s financial status conducted by either the Official Receiver or a Trustee in Bankruptcy. This assessment entails gathering details about assets, liabilities, income, and expenses. 

If the debtor possesses assets such as property or vehicles, these may be sold under the supervision of the Trustee to generate funds for settling debts. The distribution of these funds to creditors follows, with the priority of payments often dictated by bankruptcy laws. 

Additionally, debtors might be required to make supplementary contributions towards their debts over a three-year period, a determination made by the Trustee based on financial circumstances. Unlike alternatives like Individual Voluntary Arrangements (IVAs), bankruptcy typically lasts around 12 months, providing a relatively swift resolution. 

Once this period concludes, the Trustee grants discharge to the debtor, effectively writing off any remaining debt owed to creditors and offering a fresh financial beginning.

But what if there’s a silver lining? What if bankruptcy could offer you a fresh start free from the shackles of debt? The answer isn’t straightforward, and the path is fraught with questions.

When Would Bankruptcy Be Right for Me?

Bankruptcy may be the right option for individuals facing overwhelming debt and lacking assets or spare income to repay creditors. It offers a quicker resolution compared to an Individual Voluntary Arrangement (IVA) and typically involves paying a lesser amount for a shorter period.

• However, bankruptcy carries significant risks that should be carefully considered before proceeding. 
• Assets are not protected during bankruptcy, potentially leading to the sale of personal belongings, including cars and houses. 
• Certain job positions may be restricted to individuals who have declared bankruptcy. 
• Additionally, bankruptcy negatively impacts credit scores for six years, and the process may be publicly disclosed in a newspaper. 
• If the individual owns a business, it may be forced to close, with assets sold off to repay debts.

Given these considerations, bankruptcy may be suitable for individuals who are not homeowners, possess few assets, and lack spare income to repay debts through alternative means.

However, it’s essential to weigh the benefits and drawbacks carefully and seek professional advice before deciding to pursue bankruptcy.

When would an IVA be Right for You?

An Individual Voluntary Arrangement (IVA) might be the right choice for you under the following circumstances:

• Asset Protection: You have valuable assets like your home or car that you want to protect from potential seizure or repossession.
• Stable Business Income: You own a business that generates consistent revenue, which you can allocate towards monthly payments as part of the IVA agreement.
• Employment Stability: You have a job that you might lose if you were to declare bankruptcy, and an IVA could help you avoid such consequences.
• Steady Personal Income: You have a reliable source of income, and although it may not cover the entirety of your debts, you can allocate a portion of it towards monthly repayments.
• Access to a Lump Sum: You possess a substantial lump sum of money that you can use to settle your debts in accordance with the terms of the IVA agreement.

Now you may be wondering what times will be bad for applying for an IVA. Keep reading. The next section has answered this query in detail.

When would an IVA be Bad for You?

An Individual Voluntary Arrangement (IVA) might not be suitable for you in the following circumstances:

• Uncertain Financial Stability: Committing to an IVA could exacerbate your financial difficulties if your financial situation is unpredictable or likely to worsen in the foreseeable future. It’s because the uncertainty regarding your ability to meet monthly payments increases the risk of IVA failure.
• Difficulty in Meeting Payments: An IVA may not be the best option for you as if you anticipate challenges in keeping up with the agreed-upon monthly payments. Failure to meet payment obligations could result in the termination of the IVA. As a result, you may end up facing legal action from creditors again since now you have failed the agreement.
• Risk of IVA Failure: You may face severe consequences if the IVA fails due to non-compliance or inability to adhere to its terms. Creditors would no longer be bound by the agreement. Worse case scenario, potentially leading to bankruptcy proceedings and additional financial burdens.
• Financial Deterioration Post-IVA: If the IVA fails, you might find yourself in a worse financial position than when you initially entered into the arrangement. Additional fees charged by the Insolvency Practitioner and the inability to secure credit for a significant period can further compound your financial challenges.

If you are unsure about the most suitable debt resolution option should seek advice from independent debt charities such as National Debtline or Payplan to assess their circumstances and make informed decisions.

Final Thoughts 

Deciding between an Individual Voluntary Arrangement (IVA) and bankruptcy is a big deal. Both have their ups and downs.

• IVAs let you make a plan to pay back what you owe over time while protecting your stuff. But they come with strict rules, hitting your credit score hard, and failing can lead to even more trouble.
• Bankruptcy is faster but riskier. It might be better if you don’t have many assets or spare cash. But it can mean selling off your things, job limits, and messing up your credit for years.

In the end, what’s right depends on your situation. Getting advice from debt charities can help you figure out the best move for you.