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An individual voluntary agreement (IVA) and bankruptcy are both ways you can clear some or all of your debt. Because they are forms of insolvency they’re legally binding and your creditors can no longer chase you for payments. But there are pros and cons to each which you should consider.
Bankruptcy is usually a last resort when you have no money to contribute to your debts. It can be completed in a year, after which everything you owe is wiped. An IVA can last up to six years and involves you making either a lump-sum payment or regular monthly payments at a level you can afford, agreed with your creditors, for five years. These payments won’t necessarily add up to the amount you owe and any unpaid debts will be wiped once the period is over.
Each one works in different ways and has different repercussions which you should factor into your decision. However, there are some similarities:
Each agreement will vary depending on your circumstances. But an IVA usually covers unsecured debts such as credit and store cards and personal loans, whereas bankruptcy can cover all your debts, including any you owe to a mortgage lender.
There are some exceptions. For example, neither will cover magistrates fines, child support or student loans.
With an IVA you will usually pay more back over a longer period, so it can be the more expensive option. It must also be overseen by a registered insolvency practitioner who may charge up to £5,000 to set the IVA up and then earn a monthly fee for managing it. Working with a debt charity is the cheapest way to organise an IVA.
Bankruptcy costs a one off fee of £680. However, if you have assets of value, you will probably be forced to sell them and the proceeds split between your creditors.
You will not be asked to sell your home if you have an IVA, as long as you continue to pay the mortgage. But if you have equity in it – you own some of the property without a mortgage – you’ll be asked to remortgage your home to release those funds to pay the IVA. If you’re unable to do this you’ll be asked to make a maximum of 12 extra payments on top of the usual five years IVA period.
You will also be able to keep your car as long as you couldn’t reasonably be expected to have a cheaper model. You won’t be asked to sell personal items such as engagement rings and computers but if you have luxury objects, such as artwork, your creditors may ask you to sell them.
It is unlikely you’ll be able to keep your home if you file for bankruptcy. It will be sold to help repay the money you owe. Equally, you’ll be forced to sell your car and other non-essential items of value such as jewellery.
If you do have some equity in your home, one alternative is to sell it quickly to pay your debts and avoid the downsides of bankruptcy. We specialise in buying homes quickly and cost effectively and can have funds in your account in just seven days.
We’ve discussed what an IVA is in detail, but it’s worth taking a closer look at how the bankruptcy process works:
If you’re thinking about entering an IVA or going bankrupt to clear your debt, the first step is to talk to an independent debt advisor. They will be able to chat with you about your situation and what might be best for you. They’ll also be able to look at ways to reduce your costs and other options such as debt relief orders.