IVAs vs Bankruptcy
If you’re at the point of considering personal insolvency, you may be wondering about the differences between IVAs and bankruptcy. Why would you have an IVA instead of declaring yourself bankrupt? Would it be better to just bite the bullet and get it over and done with?
Yes and no. Depending on your financial and life circumstances it may be that you have no choice but to have an IVA. If you’re in a position of fiscal responsibility or power you may not be able to declare bankruptcy – there may be a clause in your contract preventing you from doing so or risk losing your job. Or you may feel that you want to pay back your creditors at least of some of what you owe.
The advantages of IVAs are numerous, but should be considered in light of their disadvantages too, and the impact both could have upon your financial and personal circumstances.
Advantages of IVAs over bankruptcy
Bankruptcy has always had a stigma attached to it. Despite society being more open and tolerant to financial mistakes being made, particularly in light of the banking crisis and credit crunch, many people with debts still feel that bankruptcy is a mistake that should be avoided at all costs.
An IVA protects you from creditors, in that it is a legally binding agreement that they must deal with your Insolvency Practitioner and only them, and that they will receive one set payment every month. It is illegal for them to do otherwise. Bankruptcy on the other hand doesn’t stop creditors from calling to try their luck, and occasionally even to try and bamboozle you into paying something that you are no longer responsible for paying. It can take some months to finally get the phone to stop ringing.
Certain jobs, particularly those where money is concerned, usually have an employment clause written in that you must not be declared bankrupt or it would be considered gross misconduct and you could lose your job. An IVA protects your career by preventing creditors from taking action against you while allowing you pay off some of the debt you owe to creditors and then write off any unaffordable debts you cannot pay.
IVAs can help you regain a sense of control over your financial affairs. Being protected from creditors and paying back only the debt you can afford immediately takes away the stress of being in debt and increases your self-esteem and confidence. Bankruptcy on the other hand, while providing immediate relief that the debt mess is over, can sometimes have a nasty sting in the tail in the form of guilt for many months, if not years afterwards.
IVAs teach you a valuable financial lesson - to plan your expenses and live within your means. For five years that lesson will come around every month, making sure that by the end of the IVA new financial skills are firmly embedded into your life. Bankruptcy on the other hand clears the debt but doesn’t address any of the reasons how you came to be in debt in the first place.
Disadvantages of an IVA over bankruptcy
You credit rating is going to take a knock whether you have an IVA or declare bankruptcy. However, with bankruptcy you can start rebuilding your credit rating straight away, while with an IVA you have to wait five years before you can begin.
An IVA lasts five years, which can sometimes feel like a long, long time when you’re doing one, and then you still have to rebuild your credit rating afterwards. Bankruptcy could leave you debt-free in a matter of weeks.
If you fail to keep up with your payments, the protection you once had from your creditors will stop and they can legally take action against you. Any payments you have already made could come to nothing and you could be made bankrupt anyway.
You must have a minimum of £15,000 of debt with three different creditors to obtain an IVA. If you do not, you will have to arrange another debt management solution. Bankruptcy on the other hand has no minimum debt levels.
Because you need to have more than £175 of surplus income to put towards debt payments you can usually only take out an IVA is you have a job. With bankruptcy it doesn’t matter whether you have a job or not.