When individuals can’t afford to pay their debts, they may assume that bankruptcy is their only option to relieve them, which isn’t necessarily the case. Individual Voluntary Arrangements (IVA) can be a viable alternative and a popular choice for individuals and sole traders looking to pay off their debts at a rate that suits them. Whether you choose to apply for an IVA or bankruptcy, both processes have advantages, disadvantages, and effects on your assets.
What is an IVA?
An IVA is an arrangement which consolidates your debts into a single monthly payment. That payment is tailored to what you can afford and distributed to your creditors. The agreement typically lasts five years, although they can last longer.
The arrangements are tailored to individuals and sole traders, and generally, last five years. They tend to be more flexible than bankruptcy, and your insolvency practitioner (IP) can customise it to suit your circumstances.
At Wilson Field, our IP’s fees are not charged in addition to your monthly payments. Instead, they’re taken from those payments before they’re distributed to creditors.
Benefits of an IVA
An IVA offers several benefits over applying for bankruptcy.
- All your debts’ interest rates and charges are frozen during the IVA.
- The IP takes over all communication with your creditors, so you won’t have to deal with them directly.
- Creditors can’t take legal action against you while the arrangement is active.
- Once the arrangement concludes, any unpaid debt is written off.
- If you’re living in rented accommodation, it’s unlikely the IVA will affect anything, so long as you keep paying your rent.
- If you’re a business owner, the IVA shouldn’t affect the company so long as the debt is unrelated.
- If you own a home or a car, you won’t be forced to sell it, although you may have to re-mortgage your home.
Drawbacks of an IVA
Despite the benefits offered by the IVA, mentioned above, there are drawbacks that you should consider before applying.
- An IVA will impact your credit rating and will stay on there for six years, meaning it may be harder to secure credit in the future.
- The IVA must be approved by at least 75% of the creditors by the value of the debt. If the IVA doesn’t provide the creditors with a high enough return or would provide a lower return than if you were to go bankrupt, they could reject the arrangement.
- If you fail to keep up with the repayments, the IVA could fail, and you may have to apply for bankruptcy.
- If you’re a solicitor or accountant, an IVA may hinder, or prevent you from practising. Check your contract, or with your trade union before applying.
- Your name is added to the Individual Insolvency Register, which is removed three months after the IVA finishes.
- Debts less than £10,000 may not be suitable for an IVA.
What is personal bankruptcy?
If you’re unable to pay your debts, and the value of those debts don’t justify an IVA, you can apply to go bankrupt. Like an IVA, bankruptcy writes off your debts if you can’t afford to repay them and is more suitable if there is little to no hope of you repaying it, and you have few assets.
Bankruptcy writes off all unsecured debts and gives the individual a chance to start again. Funds generated from your personal assets will be used to pay off the debts.
You can apply for bankruptcy online at gov.uk, or in some cases; a creditor can apply to make you bankrupt if you owe more than £5,000.
Benefits of bankruptcy
Although bankruptcy is sometimes considered a less desirable option compared to other insolvency avenues, there are benefits to be gained from it.
- Unsecured debt is written off.
- You’re protected from your creditors’ legal action.
- Interest and charges on your debts are frozen for the duration.
- An amount of your debt is written off.
- Bankruptcy is generally a quicker process than an IVA, and you are normally discharged after one year.
Drawbacks of bankruptcy
Despite the easing of creditor pressure and the protection from legal action, there are aspects you should consider when applying for bankruptcy.
- You have very little control over the process.
- You may have to sell your assets, including high-value possessions and your home if you have equity in your property.
- Your bankruptcy is made public.
- Bankruptcy can affect your profession if you work in the following fields: Directors of limited companies, accountancy and finance, pub owners, police, solicitors, and property. Check with your employer or trade union before applying.
Applying for an Individual Voluntary Arrangement (IVA) or bankruptcy are both methods of relieving personal debt. An IVA is similar to a CVA; an IP will help you create an agreement with your creditors to pay back your debt in monthly amounts. A licensed IP must manage an IVA, while you can apply for bankruptcy yourself, or a creditor can apply to make you bankrupt if you owe more than £5,000. Both have their advantages and their drawbacks. Both affect your credit rating, your career if you work in certain professions, and regardless of whether you choose an IVA or bankruptcy, it will be made public on the Individual Insolvency Register. We’d advise you to carefully consider your options before applying for either an IVA or bankruptcy.
How we can help
If you’re struggling with personal debts, or you’re under pressure from creditors and want to avoid bankruptcy, speak to us today. We have years of experience in helping people and businesses to repay their debts. Speak to one of our initial advisors, who can help you find the best way forward, whether that’s applying for an IVA or other options which may suit you better depending on your circumstances. Our advice is free and impartial with no obligation.
Book a free telephone consultation with one of our initial advisers