Five-minute guide to... IVAs and bankruptcy
Nearly 74,000 bankruptcies and individual voluntary arrangements (IVAs) were declared in the first three-quarters of 2010, according to The Insolvency Service.
Although a last resort, they may be a good option if your debts are out of control. So what do you need to consider?
What are they?
Both IVAs and bankruptcy are forms of insolvency, allowing you to write off your debt. An IVA is a legally binding agreement, usually used for unsecured debts such as credit card balances, where the lender freezes the interest on the debts and the borrower agrees to pay back a fixed amount each month for a set period.
Bankruptcy is more severe and effectively erases all unmanageable debts (excluding student loans), but you lose control of your assets.
How do they work?
With an IVA, an insolvency practitioner will decide how much you can feasibly pay back after living expenses and then agree on a set amount with the creditors, typically around £200 a month. This is usually fixed for five years, after which the remaining debt is written off.
Bankruptcy must be filed through a County Court, with a "statement of affairs" detailing how much you owe and to whom. An official receiver administers the bankruptcy and divides your assets between creditors. Bankruptcy usually lasts a year, although it will stay on your credit record for six years.
How much will it cost me?
All your IVA costs (typically about £5,000) come out of your monthly contributions to the creditors and go to the insolvency practitioner. Bankruptcy costs less at £600, paid upfront.
Do I have to pay any money back?
When you have been declared bankrupt, your creditors cannot chase you, and any outstanding debts (except for student loans) are cleared.
Under an IVA, your debts and interest are frozen and you pay a set amount each month.
Who are they suitable for?
IVAs are suitable for people with a regular income from which monthly repayments can be made. IVA recipients must owe more than £15,000 to at least three different creditors, and will typically be homeowners.
Bankruptcy is more appropriate for individuals with few assets who owe large amounts.
Will they affect my credit rating?
Both will have a detrimental effect on your credit rating. Bankruptcy stays on your credit record for six years, after which accessing credit may still be difficult.
Under an IVA, you won't be able to borrow any more cash or use credit cards.
Can I lose my home?
Under an IVA you keep your home, provided you don't miss your monthly payments.
However, if you file for bankruptcy, the official receiver will consider the equity in your home as part of your assets, so you could lose it.
Before making any decision, check out the Citizens Advice Bureau (citizensadvice.org.uk), the National Debtline (nationaldebtline.co.uk) or the Consumer Credit Counselling Service (cccs.co.uk) for help and advice.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
An alternative to bankruptcy, an Individual Voluntary Agreement is a legal agreement drawn up between the debtor, all creditors to whom money is owed (banks, credit cards etc) and a licensed insolvency practitioner who then administers the arrangement. Unlike a debt management plan (DMP), which is a more casual arrangement, an IVA is a legal process by which your unsecured creditors cannot then pursue you for payment of your debts outside the agreement. To qualify for an IVA, you must be a private individual (not a company), your debts must exceed £15,000 and you must have a regular income. If you are a homeowner with equity in the property, you may have to remortgage and use the equity to clear some of the debt before you enter into an IVA.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.