IVA Versus Bankruptcy

Personal insolvencies increased in the third quarter as Britain's households struggle to make ends meet.

According to the Government’s Insolvency Service, 27,087 people became bankrupt or entered into an Individual Voluntary Arrangement (IVA) in England and Wales between July and September of this year. This represents an 8.8pc increase on the previous quarter and an increase of 4.6pc on the same period a year ago.

PricewaterhouseCoopers, the accountancy firm, said it expected overall levels of insolvencies to continue to rise over the coming months as the economic downturn deepens and everyday household expenditure puts greater pressure on consumers to use unsecured borrowing.

Pat Boyden, a personal insolvency expert at PricewaterhouseCoopers, said: “Bankruptcies have increased for the first time for some months and this significant rise is worrying. Yesterday’s interest rate cut may bring some relief although it may be too late for those in deep financial difficulty.

“The trend towards bankruptcies away from IVAs is cause for concern for banks and credit card companies as bankruptcies return far less than IVAs and debt management plans (DMPs).

"There is growing recognition of DMPs as a third form of insolvency. DMPs are unregulated and no definitive data exists, and, while estimates of the frequency of cases vary, it is our view that there are potentially at least the same number again as IVAs and bankruptcies combined. This may mean that the true number of insolvencies is far greater than revealed in official statistics”.

Louise Bond of uSwitch.com, the price comparison service, said: “It’s worrying that so many people are resorting to individual insolvencies, be it an IVA or bankruptcy, to resolve their personal debt problems. These measures should always be the last resort for anyone with financial problems as they have a very serious impact on people’s credit histories and their ability to borrow in the future. In the case of bankruptcy, it could also impact on employment prospects.

“At the moment, consumers are being hit from every angle with price rises across all areas. This may be making many people feel that their finances are simply out of control. If people find themselves in financial difficulty the worst thing they can do is ignore the problem and hope it goes away. It won’t.

"Banks have a duty to help people in financial hardship and free debt advice is readily available from organisations such as the Consumer Credit Counselling Service, National Debtline and Citizen’s Advice. I would strongly urge people to start taking action before they reach financial breaking point.”

Legal changes have tried to remove some of the stigma of bankruptcy – and those who go down this route are discharged after just a year. But they will still feel the repercussions for many years afterwards. Even once discharged, a bankruptcy record will stay on your credit file for at least five years – making it difficult to obtain a mobile phone contract, let alone a bank account or mortgage.

An IVA may seem a less severe option – but even this will affect your future credit rating. In some cases people may find it difficult to rent a flat or even get a particular job, if it is a financially sensitive position.

If your debts are threatening to get out of control you should seek independent advice as a priority. There are a number of reputable debt advice agencies that should explain the options open to you without trying to sell you a particular "debt solution".

Among other things, debt advisers will help you prioritise repayments, to ensure there is less chance that your home is repossessed.

Bankruptcy and IVAs should be seen as a last resort, and in many cases may not be necessary. Debt Free Direct, a debt solutions company, says one third of its customers enter into debt repayment plans, which are informal arrangements with creditors.

The key is to get individual advice. If you have no assets and no income then bankruptcy is probably the best option. But if you are in a professional career you may lose your livelihood by going bankrupt – solicitors and accountants, for instance, will be struck off. So an IVA may be a better option.

The following provides more information on each course of action.

Individual Voluntary Arrangements (IVAs)

IVAs were introduced to provide an alternative to bankruptcy. The types of debts dealt with by IVAs can include personal loans, credit card balances and other forms of "buy now, pay later" unsecured loans.

An IVA is a legally binding contract between a debtor and his or her creditors. It allows a person to make a formal proposal to settle a debt within a reasonable and fixed period of time. The contract is typically for five years.

An insolvency practitioner (IP) will help put the proposal to creditors and negotiate an agreement. The debtor will have to disclose full details of his or her financial circumstances.

If more than 75pc of the creditors accept the terms of the proposal, it is binding on all the creditors. Creditors can put forward changes to the proposal but the debtor can decide whether or not to accept them. Any interest and debt charges will be frozen and creditors are not allowed to demand additional payments.

The debtor will make monthly payments, usually a minimum of £200, to the IP based on what it is agreed the debtor can afford. Once the final payment is made, any remaining debt is legally written off.

Bankruptcy

A bankruptcy order may be obtained by any creditor owed more than £750. A debtor can bankrupt himself by filling in the relevant forms at a county court.

The debtor's assets are then sold and the money is distributed – after the insolvency practioner's costs – to creditors. Some assets, unless they are of very high value, are exempt. These include tools of trade, pensions, ordinary household contents and possessions – including a car.

In most cases, bankruptcy ends after one year or less. After this, the slate is wiped clean.

IVAs versus bankruptcy

Credit-rating agencies do not make much distinction between an IVA and a bankruptcy case.

One of the biggest setbacks with bankruptcy is that you may lose your assets – including your house – but the IVA process is different. You may have to give up some of the equity in your house, but you will not necessarily lose the roof over your head.

Bankruptcy is also a public matter – legally, there are some parties that must be informed, such as your bank. It will also be published in newspapers, so you will not be able to control who finds out. An IVA is a more private option. While your IVA will be published on the Insolvency Service website, it will not be published in any newspapers.

But going bankrupt can take the pressure of creditors away from you. You are allowed to keep certain things, such as household goods, and a reasonable amount to live on. When the bankruptcy order is over, you can make a fresh start and the money you owe is usually written off. In many cases, this can be after only one year.

But even when you are no longer bankrupt, you could have another order (called a "bankruptcy restrictions order") made against you. These orders can be made if, for example, you took on debts knowing that you had no hope of paying them back.

A bankruptcy restrictions order can last for 15 years and will make your financial affairs very restricted – even when you are no longer bankrupt, there are some debts such as court fines and student loans that will never be written off.

Remember that the set-up costs of an IVA can be high and you may have to pay an upfront fee. You can also take out an IVA only if you can afford to repay some of your creditors – and if you don't keep up the payments, you can be made bankrupt anyway.

If you need help with a credit problem