IVA or Bankruptcy: Which is the best solution for me?
This is one of the most difficult questions facing people with a serious debt problem because, on most occasions, the answer isn't straight forward. Often, people struggling with debt believe that bankruptcy is their only practical solution, which is obviously not the case.
Even now, after nearly 30 years since their introduction in to insolvency law, many people living with debt problems in the UK are unaware that IVAs even exists.
Yet, for many, the IVA option has the potential to provide them with a realistic alternative to bankruptcy.
Your personal circumstances
The determining factors as to which debt solution is best for you will be based around your personal circumstances.
Understanding how each solution will impact on your personal circumstances should help you to recognise which option to choose but, if nothing else, should hopefully give you a sense of which option you naturally prefer.
So, lets begin by taking a look at the differences between the two solutions.
Compromise to keep control
Because an IVA is a voluntary arrangement, creditors do not have to accept your IVA proposal.
Creditors issue minimum requirements to ensure they get at least a certain level of what they want and, if a proposal doesn't meet their minimum requirements, they can, and probably will, reject it.
Therefore, to get their approval, you're going to have to be prepared to compromise.
In contrast, bankruptcy creditors don't get a choice. When you petition for your bankruptcy you take that choice of rejection away from creditors. They are obliged to accept the decision of the Official Receiver whether they like it or not, irrespective of the financial outcome to them.
Unfortunately, the loss of control works both ways, because the bankrupt loses control too.
The bankrupt loses all control over all their assets and how those assets will be disposed of, or liquidated, for the benefit of the creditors. A point which can be disastrous for those people with assets, such as homeowners, those with savings, and those professionals who face sanctions and will no longer be able to practice in the event of bankruptcy proceedings.
Furthermore, failure to co-operate with the Official Receiver can lead to a Bankruptcy Restriction Order (BRO).
The importance of this difference cannot be understated.
Quite simply, this difference alone might determine whether an IVA favours your circumstances more than bankruptcy.
How much will you repay?
In most cases, bankruptcy lasts for only 12 months after which you're automatically discharged. However, if you can afford to make repayments to your debts you will be expected to do so for 3 years.
In an IVA, it's likely that you are going to have to make payments for at least 5 years. So it's true to say that an IVA will take longer to complete and repay more of your debt than bankruptcy.
But the IVA will allow you to keep a greater degree of control over your financial affairs, something which, for many, is enormously valuable.
How an IVA works
As said earlier, an IVA does have its advantages and an IVA does provide a serious alternative to bankruptcy for those keen to avoid it.
Typically, this would include people trying to protect an asset, such as their home, or perhaps protect an income that might be vulnerable under the bankruptcy process.
An IVA can provide this protection by gaining creditor approval through compromise.
An IVA proposal offers a discreet opportunity to approach creditors detailing what you can offer them in repayment. As long as you proposal offers a better financial return to creditors than they could otherwise expect from a bankruptcy, it should be agreeable.
The compromise being a longer payment period in order that certain assets can be retained.
IVAs make sense if you have things to protect
Every IVA has to make sense to both sides, otherwise agreement won't be reached.
Never more is this evident than when the IVA applicant is a professional whose professional status might prohibit bankruptcy action.
Members of the armed services, police officers and prison wardens, as well as accountants, lawyers, bank employees and those working in the financial sector might all find their terms of employment prohibit bankruptcy.
So, yet again, it comes down to compromises. Creditors appreciate they wouldn't gain anything from seeing a debtor lose their income stream through bankruptcy because it would, obviously, have a catastrophic impact on their ability to repay their debts.
An IVA, being a private arrangement, does not carry the same sanctions as bankruptcy. It allows the applicant to keep practicing their profession, whilst giving creditors the benefit of a more favourable financial return.
Bankruptcy makes sense if you have nothing to protect
As mentioned before, bankruptcy provides the quickest and cheapest way out of debt.
If you don't any assets that need protecting, or if your income is safe under the bankruptcy process, then bankruptcy will provide the path of least resistance to becoming debt free.
This is especially true when you can't afford any repayments to your debts.
Other than the actual bankruptcy costs, which at the time of writing is £700 per person, the bankruptcy process does expect payments to be made when there's no surplus income.
If you are trying to decide which option you should opt for, you should bear this in mind. Bankruptcy is not a punishment.
Bankruptcy is a legal process that allows people with serious debt problems a chance to wipe the slate clean and making afresh start.
But you decide what's best for you
It is not necessary to have a practical reason for wanting to avoid bankruptcy.
Many people want to avoid bankruptcy because they simply want to repay as much of their debts as they can afford, whereas for others it might be to avoid the stigma they associated with bankruptcy.
Deciding on entering an IVA, rather than declaring yourself bankrupt may quite simply be a personal preference, based solely on your desire to avoid bankruptcy if at all possible.
It isn't a requirement to have assets that need protecting, or to be in a profession that might be impacted by bankruptcy.
The only requirement is that, whatever option you choose, you do so because it's your preferred choice.