Bankruptcy or an IVA?


A record number of people went broke last year as they struggled under the weight of the UK's £1.3 trillion debt mountain.

Worried woman

According to the Insolvency Service 107,000 people went bust last year, with 63,000 people choosing bankruptcy and 44,000 opting for an Individual Voluntary Arrangement.

The growth of IVAs has far outstripped that of bankruptcy, and debt charity the Consumer Credit Counselling Service has warned that people are being put off bankruptcy because of the social stigma - even though it can be the best option.

A CCCS spokesman said: 'Both IVAs and bankruptcy should be taken as a last resort, but if you planning on insolvency you should be sure that you chose the correct path.'

We outline the differences and what type of person should apply for which.


IVAs are suitable for people who earn a regular income, have debts in excess of £15,000, a major asset they want to protect, a high-level job and a level of discipline to see the contract through to conclusion. A typical IVA client will be a young professional in a good job that has simply borrowed too much money.

An IVA is a formal court agreement between lender and borrower. The debtor will promise to pay a set monthly sum for between three and five years in return for a portion of the debt being written off. If the contract fails, the debt reverts to the original level regardless of how much has already been paid off and the individual is likely to be made bankrupt anyway.

The debtor must be able to afford to repay at least £200 a month and if they are likely to struggle to raise that figure throughout the period, they should look at other options. That's why people with IVAs are usually in well-paid employment.

They also tend to own property. The main benefit of an IVA is that your home is largely protected from creditors and you have some say in how other assets, such as cars, are treated. The creditor cannot force them to sell their home to repay debts, but at the end of the process they can force them to revalue the property.

If it has risen in value they can make them release the equity to make a final contribution towards the outstanding debt. Also, if they are driving an expensive car, debtor may be asked to sell it and buy a cheaper model, with the difference going to creditors.

Professionals who run into financial trouble typically opt for an IVA. If they choose bankruptcy they are not allowed to be involved in promoting, forming or managing a company without the permission of the court. They are also likely to lose professional accreditation if they work in careers, such as accountancy.

The proportion of debt written off under an IVA can be up to 75%, but lenders are tightening up on the number of IVAs they approve and how much they are prepared to wipe off. For example, HSBC used to accept IVAs that would return them 25p in every £1, but now it has raised the bar to 40p.

They are arranged through specialise insolvency practitioners and start-up costs can run into thousands of pounds. Although IVA companies claim that consumers do not pay, but in reality repayments in the first year of the contract goes to the insolvency practitioner.


• You get to keep hold of major assets, such as a property

• You are not prohibited from any employment

• Between half and two thirds of the debt may be written off


• It's a lengthy and brittle process. If the IVA fails, individual is back to square one

• Creditors can make a further claim if the value of individual's property rises during the contract

Dealing with debt


Worried man in debt


People who choose bankruptcy tend to earn a very low, irregular or no income, own no major assets such as property, work in careers that do not involve cash and have no way of committing to regularly making monthly repayments to creditors.

The average person that applies for bankruptcy will be in their thirties, but there is a growing number of people in their fifties and sixties that have experienced a major life change, such as illness or divorce, who are applying.

Contrary to popular belief, a person does not have to be in thousands of pounds of debt to become bankrupt. An unsecured creditor can apply to make an individual bankrupt if they are owed just £750, while anybody can apply to declare themselves bankrupt. You will have to pay £310 towards the cost of the administration of your bankruptcy by the official receiver. Court fees on top of that are usually £140.

Under bankruptcy, the debtor no longer has control over any assets. An official receiver will be appointed to deal with creditors, informing them of how much money will be shared from the bankruptcy. The receiver will then dispose of any suitable assets, such as property or cars, to pay off the creditors. Individuals are allowed to keep their car if it vital for their work.

For that reason, debt charities are recommending it to people who don't own any major assets. However, if a bankrupt person has dependants it is possible to delay the sale of a property for 12 months to find alternative accommodation. Or if they own part of a property, their spouse, family or friend may be able to purchase that part of the property from the receiver.

After a period, usually one year, debts are written off. However, the bankruptcy notice stays on their credit report for a further six years, making it difficult to obtain credit. If you come into any money while the bankruptcy order is still in place, this could also be taken away - if you win the lottery, for example.

Bankrupts are barred from many jobs, including most positions in financial and legal services, the police and armed force, and people working in those fields should consider alternatives. Bankrupts are also barred from being a company director.

Once a debtor has been discharged from bankruptcy, they are no longer liable for any outstanding debts, as long as they were detailed in the bankruptcy proceedings.


• It's a quick process, an individual can be discharged from bankruptcy after a year

• If you don't own any major assets, can be an effective way of clearing debts

• You are debt-free after being discharged


• You have no control over assets – the receiver can sell them to repay creditors

• You are restricted from working in certain jobs, such as law or accountancy

• It can be difficult to obtain basic banking services in future

• The bankruptcy note remains on your credit report for six years

Bankruptcy or an IVA?

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