Explained: The difference between bankruptcy and an IVA

Bankruptcy and an IVA are both debt solution options for people who are in severe financial difficulty. On paper, the processes appear to have a number of similarities, but take a closer look, and they present two very different potential paths when dealing with debt.

Most people are probably more familiar with bankruptcy, often viewed as a 'last resort' for people who can no longer afford to keep up with their finances, but distinguishing what that will mean for an individual isn't always clear.

Time period

Bankruptcy and IVAs have a number of crucial differences, including the duration of the processes. Usually, an IVA agreement between you and an insolvency practitioner lasts for five years. If payments are met throughout that period, existing debts are then cleared after that time. In contrast, the duration of bankruptcy is normally 12 months, although payments can last up to three years. In exceptional cases, restriction orders can be implemented for as long as 15 years.

Amount of debt to pay off

Becoming bankrupt will mean all of your debts will be written off, whereas an IVA will clear up to 75 per cent. Single monthly payments will be required with an IVA, and are determined by assessing your current financial situation. People who opt for bankruptcy on the other hand, might not have to pay anything towards the debt if they have less than £20 disposable income a month.

Employment

As with all debt solutions, careful consideration on how it could impact your professional career is strongly recommended. For most employees, entering into an IVA will have little impact, although it is not suitable for people who are currently unemployed. Individuals who are declared bankrupt while being a director of a company will not be able to take up or continue the position during the year in bankruptcy. Some professions could also forbid people in this situation to continue working completely. If you are self-employed you could be at risk of being forced to close down your business and sell off the assets when being made bankrupt.

Home and other assets

Although an IVA doesn't necessarily mean you have to sell off all your assets, such as your property, if it has equity, you may be required to remortgage to pay a lump sum during the last year of the arrangement. During the actual IVA process, you will not be able to get a mortgage.

Homeowners considering bankruptcy need to be aware that by way of writing off existing unsecured debts, assets may have to be sold off in order to pay creditors. This means you could lose all equity from the house. There are other options, including selling a share of the property to someone close to you to release the equity and remain in the home.

If you don't own your home and live in rented accommodation, there is a chance that the tenancy agreement will not allow people in bankruptcy to continue living there, and your landlord could be informed of your situation.

Lasting impact

Records will remain on your credit reference file for six years if you take out bankruptcy or an IVA, and both options could result in difficulty getting credit during and after that period. Undoubtedly, both options need very careful consideration as they will both have a significant impact on your life, even after the arrangements have come to an end.