This page compares IVAs and bankruptcy. If you want all the details on each, check out the IVA and the bankruptcy. guides. But looking at the pros and cons of each doesn’t always help you decide what to do, so this article compares the two.
This is a very big decision to take – it can feel like you are being asked to predict the future. No-one knows exactly what will happen, but often you can work out what is more likely to be important for you and your family.
There is a third type of insolvency – if you owe less than £20,000 and are renting, see if you meet the criteria for a Debt Relief Order. DROs are better (cheaper, simpler, quicker) than either bankruptcy or an IVA.
Three “easy” cases
For some people the choice between bankruptcy and an IVA is actually easy if you focus on the important things:
You have no assets to protect
If you don’t have any assets to protect and your job would not be affected by bankruptcy, then bankruptcy is the obvious choice.
If you have nothing to protect, then an IVA has no advantages for you! And the disadvantages are that you will pay more, over a longer period and it can go wrong and fail.
Your well-paid professional job would be affected by bankruptcy
Here you should probably focus on an IVA. Also if you have complicated assets that you want to protect – shares in an unlisted family company, that sort of thing. You are the sort of person that an IVA was designed for.
But very few jobs would actually be affected by bankruptcy, so find out the facts and don’t assume yours will be. Also in some financial services jobs an IVA is just as big a problem as bankruptcy is!
Your income/health/family situation isn’t stable
If you have poor health, your job is vulnerable or your income is very variable then bankruptcy is usually a better choice because IVAs are not flexible arrangements.
Do not believe any firm trying to sell you an IVA who says that an IVA is flexible. Sometimes you can reduce your IVA payments. If you are paying £250 a month, your creditors may agree to take a lot less. But if you are paying less than £100 a month then there is very little room to cut this so your IVA may fail.
This also applies to your family situation. Five or six years is a long while and an IVA will often become unmanageable if you have a baby. If you have teens, what will happen to your budget when child tax credit and child benefit stop? What if a child goes to uni but can’t get a full grant as you are expected to contribute?
What is most important for your situation?
If none of those three clear situations applies to you, think which of the following points matters most for you and your family.
“I want it all sorted and over with, I need a fresh start”
That would be bankruptcy. Your bankruptcy cannot fail, an IVA can. In 2018, IVA failure rates were going up – it looks as though about 30% of IVAs may be failing. That is a very high figure.
Also although you may have to make monthly payments in bankruptcy, that will only be for three years in bankruptcy. In an IVA you are committed to repayments for five years and for many people this gets extended to six – if you are supposed to remortgage to release equity in the last year and can’t get a mortgage offer.
“I want any monthly payment to be affordable”
A lot of people are happy to pay a reasonable amount but don’t want to commit themselves and their family to a longer and more difficult struggle than is necessary
In an IVA you make payments for five or six year, in bankruptcy, you may have to make payments for three years. But the length of time isn’t the only difference:
- if all your income comes from benefits, you won’t have to make ANY monthly payments if you go bankrupt;
- in 2018, five out of six people who went bankrupt didn’t have to make any monthly payments at all;
- if your income drops or your expenses rise in bankruptcy, your monthly payments are reduced. An IVA is not so flexible.
“I can’t afford the bankruptcy fees”
This is not a good reason to choose an IVA. The bankruptcy fees are stupidly high – after all you need to go bankrupt because you don’t have hundreds of pounds in your bank account.
But if this is the only reason to choose an IVA, then you are opting for a very difficult five years instead of a few difficult months. Read this article on where to get help with bankruptcy fees.
“I don’t want anyone to know”
The names of people going bankrupt, going for an IVA or a DRO are all published on the same Insolvency Service website. There is little difference between an IVA and bankruptcy in this respect.
(Bankruptcy used to be more widely publicised, with notices in local newspapers, but now this is very rare unless you have a local business.)
“I want to stay in my house and there is no-one to buy the equity from the OR”
Are you sure? Don’t walk into an unsuitable IVA because you don’t want to have a difficult conversation with your parents or your brother – it is possible to keep your house if you go bankrupt and many people do. If you have negative equity, for example.
If your house has equity, that is a big reason to favour an IVA.
But although you won’t be made to sell your house in an IVA, since 2014 most IVAs have a “secured loan” clause which says you have to release equity by remortgaging or getting a secured loan in your last year … here is the horror story of someone who was told he had to take a 15 year secured loan at 19%.
And also think about your mortgage costs going up while you are in an IVA – a couple of interest rate rises over 2019 and 2020 the next years seems likely. Will your IVA payment still be affordable if that happens?
Because of this, an IVA is no longer the only choice if you have a lot of equity. Think about Selling your house instead, or could you remortgage at a reasonable rate?
“I would lose my car if I go bankrupt”
This isn’t a good reason to lock yourself into five years of high IVA payments. If your car is sold in bankruptcy and you need a car to get to work, you will be given money to buy a cheap second-hand one.
If you have a car on PCP finance, then how will you manage if that ends during your IVA? At that point your credit record will be wrecked and you may have to get a car on bad credit finance at 40%+ interest…
“I want to be able to get back to a good credit rating”
There is a lot of rubbish on the internet about your credit record never recovering from bankruptcy. The process of repairing your credit file after an IVA or bankruptcy is exactly same – it is no more difficult after bankruptcy than an IVA.
“I’m worried about getting a mortgage in the future”
Read Bankruptcy, IVAs and DROs – their effect on your credit records for details on this – because although bankruptcy can make it harder to get a mortgage, it may not make that much difference compared to an IVA. Many high street lenders ask if you have ever been insolvent – you have to reply yes whether you had an IVA or bankruptcy.
Conclusion – making the decision
If you are still undecided, then one way forward that might help you is to talk to StepChange about the amount that you would pay in an IVA. Once you know that, try to live off that for a couple of months whilst you think the decision through. If you find those two or three months easy, then you will feel more comfortable about signing up for the longer term, inflexible IVA; if you find managing on that money hard then bankruptcy is probably better for you.
Taking a few months to make the right choice is sensible, but don’t delay too long though – an endless Debt Management Plan isn’t a good option either.
If you decide you need to think about this, make sure you make PPI reclaims during this period, even if you don’t think you ever had PPI – see Five Reasons to reclaim PPI. Getting a few hundred pounds back will help a lot with your bankruptcy fees. And I have seen clients get more than £10,000 back, which can transform their situation so neither an IVA or bankruptcy is needed!