IVA’s are commonly seen as an alternative to bankruptcy but, what are the major differences? Put simply, to enter into bankruptcy or an Individual Voluntary Arrangement (IVA) the debtor has to be insolvent. Insolvent simply means not being able to pay your debts once they are due.
Here I look at the differences between the two and how they can affect you.
How long do they last?
An IVA usually lasts 5 years with monthly payments until the agreement is ended, usually after 60 months but sometimes 72 months. In bankruptcy the debtor would be automatically discharged after 12 months although he or she, could be expected if they have surplus money available each month, would pay that surplus for 36 months. This is known as an Income Payment Agreement (IPA).
Is there a cost involved?
Both bankruptcy and IVA’s have costs associated with them. In bankruptcy the debtor has to pay a deposit before bankruptcy. Bankruptcy is now not a Court procedure and is administered through a government portal online. In an IVA a percentage (agreed by creditors) of the monthly amount paid into the arrangement will go towards the Nominee and Supervisory fees associated with the IVA.
An IVA typically requires a surplus income of at least £80.00pcm. To be made bankrupt the debtor doesn’t need to have any surplus income.
Can I manage an IVA myself?
In an IVA the debtor works with a licensed insolvency practitioner who would act as Nominee and then, if the IVA is approved, they change hats and act as Supervisor of the arrangement. Nominee and Supervisor fees are taken from the amounts paid into the arrangement at the agreement of creditors.
All IVA’s are tailored to the precise circumstances of the individual’s (debtor’s) insolvent situation. It will take account of his/her financial position in full and propose a payment to creditors.
Will I lose my house?
IVA’s are usually entered into by debtors in order to protect any assets they may have, such as equity in their domestic property. There is however a common misconception that in bankruptcy you will automatically lose your property. This is not necessarily the case however if, for example, the house is in negative equity then your Trustee in Bankruptcy will not be interested in taking the house as it is not an asset and has no value in the bankruptcy estate.
Will this affect my job?
Bankruptcy and IVA’s can have different affects upon employment. It is always worth checking how an IVA or bankruptcy may affect your working position especially if you work in a financial environment.
What else do I need to know?
Although we are presently talking about differences it is well worth noting that both bankruptcy and IVA’s are listed on the publicly searchable insolvency register and as such both are public procedures. Another similarity is they both will be on the debtors credit file for 6 years. Both bankruptcy and IVA’s may mean that the debtor needs to open a further basic bank account with no overdraft facility with a bank that isn’t a creditor.
Once you have petitioned for your own bankruptcy, a “debtors petition” you are in the hands of the Official Receiver who is duty bound to investigate your financial affairs. If you have been made bankrupt and shouldn’t have been it may be very expensive to reverse or “annul” the bankruptcy afterwards. By law you have to cooperate with the Official Receiver’s reasonable requests and disclose all bank accounts, financial transactions and any assets that you may hold. Failure to do so may constitute a criminal offence.
In an IVA if there is a change of circumstances and you can no longer pay anything into it, it could be that the IVA fails due to the breach of not paying. This may mean that there is little alternative but to petition for bankruptcy in order to resolve your problem debt. Alternatively, your Supervisor may petition for your bankruptcy if this is the wish of your creditors.
To summarise, there is a similarity with both bankruptcy and an IVA, before embarking on bankruptcy or proposing an IVA a debtor should always seek free and impartial debt advice.
If you would like advice on any debts and possible best ways forward to deal with debts please do not hesitate to contact me. My advice is always free, impartial and confidential.