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We've already explained in detail what can happen during an IVA or a personal bankruptcy procedure Here we’ve compiled a debt help summary of the implications of opting either for bankruptcy or an Individual Voluntary Arrangement. There are advantages and disadvantages of both, but it must be emphasised that an individual struggling with debt problems has their own unique circumstances. Any insolvency procedure such as an IVA or bankruptcy should not be undertaken lightly and without first seeking professional debt advice. Also some types of debt problems can be dealt with by a less formal debt management solution , or perhaps a debt consolidation loan.
A record 23,000 people became insolvent during the first 3 months of 2006 according to the government's Insolvency Service. Over 15,000 individuals opted for personal bankruptcy, and some 8,000 entered into an IVA. The number of people in the UK taking out an IVA has quadrupled since 1993, but how can you decide which might be the best option for you if you are facing insolvency?
Pros and Cons of an IVA
- With an IVA you can have up to 75% of your debt written off, and there will be no more interest or charges added. You agree to pay what you can afford in a single monthly payment. After the duration of the IVA, which is usually 5 years, you will be debt free, and your creditors bound by the IVA's terms and cannot recoup any further money from you.
- Unlike bankruptcy, in an IVA agreement, you will rarely have to sell your home and other major assets such as a car. In fact with an IVA you are in a much better position to negotiate any agreed settlement, whereas for bankruptcy your assets are entirely in the hands of the presiding magistrate when your proceedings come to court.
- There’s far less stigma with an IVA agreement compared with bankruptcy. There’s no requirement to advertise in the newspapers, or notify your landlord or employers. An IVA won’t threaten your career if you are working in the armed forces or practising in other professions, where becoming bankrupt means that you could lose your licence or your job. Also participating in an IVA agreement will not exclude you from becoming a company director.
- With an IVA you can still run a current account and stand a better chance of obtaining credit when the duration of the IVA is over. Bankruptcy will likely have a disastrous impact on your credit rating, making it difficult or impossible to get a mortgage in the years ahead.
- The disadvantage of an IVA is that you usually make payments for 5 years: 2 years longer than bankruptcy where your payment arrangement lasts for 3 years. However, this is not a high price to pay to avoid being made bankrupt, and protecting your home and your job.
Pros and Cons of Bankruptcy
We’ve already discussed some of the implications of becoming bankrupt above, but we should also mention some further advantages and disadvantages of bankruptcy compared with an IVA.
- The period of bankruptcy is much shorter than for an IVA. Since the changes made in the Enterprise Act 2002, a bankrupt can be discharged in as little as a year with their debts cleared, but you still make payments for 3 years.
- Bankruptcy should not be considered as a soft option though. The disadvantage of bankruptcy is that you lose control of all your assets, and you will very likely lose your home.
- For many individuals without such assets, particularly young people, then bankruptcy may be a preferred option. This is especially the case if a person is not necessarily concerned about the stigma of bankruptcy, or is not in a job or an environment where their future career can be jeopardised, or is not worried about the prospect of being barred from holding public office.
- One further disadvantage of bankruptcy is that they can involve lengthy preparations for court proceeding and are more expensive to set up than an IVA.
Conclusions
If you become insolvent, whether or not you decide to apply for an IVA or bankruptcy, it has important implications for your long-term financial status, and possibly your job.
There are differences in how your assets are handled, particularly your home, as well as in the time period before you are either discharged as a bankrupt or have completed your IVA.
There are advantages and disadvantages to both depending on your circumstances, but no one should decide which is the best option without first seeking professional debt advice.
If you have any questions about an IVA or bankruptcy procedure, you can get free debt advice by calling us on 08000 434 336 any time; 24 hours 7 days a week, or if you prefer you can fill out our online form.
As well as being free, our IVA and bankruptcy advice is given without obligation.
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