Will an IVA cost me more than bankruptcy?

Summary: This article explains why an IVA may be the more preferable option to bankruptcy for some individuals, despite the overall cost.

The simple answer is yes, an Individual Voluntary Arrangement (IVA) is going to cost more than bankruptcy to a debtor. This is because an IVA aims to repay some of the debt owed over usually a 5 year period in affordable monthly repayments. Bankruptcy usually lasts 12 months, during which time there are various restrictions placed on the individual. However if there is available income, a payment order may be set up for 3 years during which time the debtor will have to maintain payments. In both cases, savings or endowment policies are likely to have to be paid to the creditors in order to lower debt.

If bankruptcy will cost me less, what is the point of applying for an IVA?

In order to answer this question, it is important for an individual to understand the differences between an IVA and bankruptcy. In short, the vast majority of people will want to actively avoid bankruptcy, and an IVA is a good alternative.

What are the benefits of an IVA over bankruptcy?

Homeowners. The most common reason for wishing to avoid bankruptcy is the risk it would place on property owned. A bankrupt will usually be expected to forfeit any assets of reasonable worth, and property is at the top of the list. An IVA is designed to account for all essential expenditure, including a mortgage, so there is little risk of losing the family home.

Credit rating. Bankruptcy and IVAs will affect an individual's credit rating in much the same way. Details of the insolvency are entered onto the record and remain there for 6 years. As an IVA usually lasts 5 years, wheat has been successfully completed, there will be only 12 months before the record is clear. Bankruptcy, lasting 12 months, means that there will be a further 5 years left before the record is clear.

Future credit. Even after details of the IVA/Bankruptcy are removed from the credit record, future lenders may still ask if the individual has ever been declared bankrupt, or been in an IVA. It is an offence to lie about this information and so it would have to be declared. Lenders may look more favourably on an IVA over bankruptcy as it shows the individual has been committed to solve their financial problem and has demonstrated they are able to budget.

Occupation. There may be some roles that individuals cannot undertake if bankruptcy restrictions are in place. This could apply to those in the financial or legal professions. Furthermore, it is not possible to be a company director, or be involved in the setting up, running or promotion of a company without permission from the court. While an IVA may have implications on some professions, as a general rule, an IVA is preferable to bankruptcy.

A can be seen while bankruptcy may be a 'cheaper' alternative to those with debt problems, an IVA is often the preferred option in the long term.