Should I choose an IVA or bankruptcy?

A lot of people who find they have no way of repaying their unsecured debts in full face a choice between an IVA (Individual Voluntary Arrangement) and bankruptcy. Both forms of insolvency can help to free struggling borrowers from unmanageable debt problems, but there are key differences between the two that you should understand before you go any further.

IVA: how it works

An IVA is an agreement with your unsecured lenders in which you’ll repay as much of your unsecured debt as you can over an agreed period of time – usually five years.

During this time, you’ll make regular monthly payments towards your debts, based on what you can afford after your other essential expenses have been covered. In return, you’ll be protected against any further action regarding your debts, as long as you keep up with the agreement.

On successful completion of your IVA, any unsecured debt you haven’t yet repaid will be written off.

There are some downsides to consider, though: in particular, your credit rating will be affected for six years after the start of the agreement, and if you’re a homeowner you may have to release equity from your home in the final year of the agreement.

How bankruptcy works

To enter into bankruptcy, you must apply at a County Court, which will assess your case. If bankruptcy is granted, you will be protected against further action for a year, after which you will usually be ‘discharged’. At this point, your debts will be written off.

If you can afford to do so, you may have to make monthly payments towards your debts for up to three years.

Like an IVA, bankruptcy will affect your credit rating for six years, and if you’re a homeowner your home may be sold to repay more of what you owe.