This page compares IVAs and bankruptcy – to find out more about each, check out the IVA page and the bankruptcy pages. This is a very big decision to take – it can feel like you are being asked to predict the future.
Don’t forget there is a third form of insolvency – if you owe less than £20,000 and are renting, see if you meet the criteria for a Debt Relief Order. If you do, a DRO is better (cheaper, simpler, quicker) than either bankruptcy or an IVA.
The three “easy” cases
For some people the choice between bankruptcy and an IVA can be straightforward:
1) you have a well-paid professional job that would be badly impacted by bankruptcy, In this case you should be focusing 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.
2) your income / health / family situation isn’t stable. If you have poor health which may get worse or your job situation 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 one who says that they are. (In some cases it is possible to renegotiate an IVA if things go wrong for you, but often this doesn’t work, especially in the first few years, and your IVA will fail.) This also applies to your family situation – five years is a long while to wait before starting a family, but an IVA will often become unmanageable if you have another 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?
3) 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. An IVA has no advantages for you, you will may more over a longer period and it can go wrong and fail.
What is most important for your situation?
If none of these three clear-cut situations applies to you, then you need to look at how bankruptcy and IVA differ and work out which of these 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.
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 more difficult struggle than is necessary
In an IVA you make payments for five years, in bankruptcy you may have to make payments for three years. But the length of time isn’t the only difference:
- the payments that you make in an IVA may be higher than those you would pay in bankruptcy, because the “allowable expenditures” are higher for bankruptcy – and frequently more realistic!
- if all your income comes from benefits, then you won’t have to make ANY monthly payments if you go bankrupt;
- in 2013/4, over 90% of people going 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.
I can’t afford the bankruptcy fees
This is not a good reason to choose an IVA. Yes 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 read this article on where to get help with bankruptcy fees.
I don’t want anyone to know that I couldn’t cope with my debts
Bankruptcy used to be more widely publicised, with notices in local newspapers, but now this is very rare. The names of people going bankrupt, going for an IVA or a DRO are all published on the same Insolvency Service website. In practice there is very little difference between an IVA and bankruptcy in this respect.
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 are sure, that is a big reason to favour an IVA, But although you won’t be made to sell your house in an IVA, most new IVAs now 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%. Because of this, an IVA is no longer the obvious choice if you have equity: take a cold, hard look at selling Selling your house instead, or could you remortgage at a reasonable rate?
I would lose my car if I go bankrupt
So? If you need a car to get to work, you will be allowed to buy a cheap second-hand one. This isn’t a good reason to lock yourself in to five years of high IVA payments.
I want to be able to get back to a good credit rating in the end
There is a lot of rubbish on the internet about your credit record never recovering from bankruptcy. Actually the process of repairing your credit file after an IVA or bankruptcy is the 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 and 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 back will pay for 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!