Key Takeaways:
- Bankruptcy and Individual Voluntary Arrangements (IVAs) are formal debt solutions designed to help individuals who cannot repay their debts in full while providing a route towards financial stability.
- Both bankruptcy and IVAs are available to individuals including those who operate sole trades and partnerships. They are not available for company debts.
- Both options can impact credit ratings for up to six years and may affect future access to borrowing.
- Neither solution is universally better; suitability depends on income, assets, debt levels and personal circumstances.
What is bankruptcy?
Bankruptcy is a legal procedure available to individuals, sole traders or business partners who can no longer afford to pay off their debts. You can apply for bankruptcy if you have no feasible way to repay what you owe.
In bankruptcy, non-exempt assets may be realised and the proceeds used to cover the costs of the process before being distributed to creditors in the prescribed order of priority. Any eligible remaining debt is then written off, allowing a fresh start.
Bankruptcy does not have a fixed end date, but an individual is usually discharged after 12 months, at which point they cease to be an undischarged bankrupt.
Restrictions while undischarged bankrupt include:
- Disclosure when applying for credit over £500.
- Not acting as a company director without court permission.
- Potential restrictions on certain professional or trustee roles.
Other consequences may include:
- Sale of non-exempt assets, including equity in your home.
- Closure or freezing of bank accounts.
- Income contributions for up to three years where affordable.
How much does bankruptcy cost?
In the UK, it typically costs £680 to apply for bankruptcy. However, if this charge is not feasible there are select charities that may be able to support you.
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Agreement (IVA) is a formal debt solution designed to help individuals who are struggling to repay what they owe. It is a legally binding agreement between you and your creditors that allows you to repay all or part of your debt through affordable monthly payments or other injections of funds over an agreed period (typically five years).
Your regular payments will be made to an insolvency practitioner, who will pay the necessary costs and then distribute the funds between your creditors on your behalf. If you have a business, you may be able to continue trading while in an IVA. However, it is important to keep up with your agreed repayments and comply with the terms of the arrangement.
If you fail to meet the terms of your IVA, your insolvency practitioner may need to refer the matter back to creditors. Creditors can then vote on whether to vary the arrangement, conclude the IVA, or pursue alternative insolvency options, which may include bankruptcy.
There are typically three fees associated with an IVA:
- Preparation of proposal fee: Typically, between £1,500 to £3,000 (upfront cost).
- Nominee fee: Around £1,500 (taken from your pot, not you directly).
- Supervisor fee: Generally, 15% of any assets included in the agreement (ongoing fee).
An IVA usually involves higher upfront costs than bankruptcy, although creditors may receive a better return, which is one reason they may support an IVA proposal.
How do I set up an IVA?
Your insolvency practitioner will assess your finances, prepare a proposal and seek creditor approval. If 75% by value of voting creditors approve the proposal, the IVA becomes binding on all creditors and prevents further legal action in respect of included debts.
Bankruptcy vs IVA: What are the main differences?
Neither bankruptcy nor an IVA is inherently better. The most suitable option depends on your financial circumstances and long-term goals.
| Topic | Bankruptcy | IVA |
| What is it? | A legal process for deal with unmanageable debt. | A formal repayment agreement with creditors. |
| Control of assets | Assets may be sold (e.g. property or investments). | Individuals may be able to retain more of their assets. |
| Debt management | Any remaining unsecured debt after the bankruptcy is concluded is written off. | A portion of debt is paid over time, and any remaining unsecured debt is written off upon completion of the IVA. |
| Financial restrictions | May involve stricter financial restrictions. | Offers more financial flexibility. |
| Impact on profession | Can affect certain professions or business activities (e.g. not available to company directors). | May have fewer professional restrictions (available to company directors). |
| Investigations into the debtor (the person who is insolvent) | Conduct of the debtor is investigated. | No investigations into the affairs of the debtor. |
| Who it may be suited for | Typically suited to individuals with limited ability to repay their debts. | Often suited to individuals with regular disposable income or those trying to retain assets such as their family home. |
| How long the process lasts | Typically, undischarged bankrupt for 12 months but bankruptcy can last for many years until everything is concluded. | Typically lasts for five years but can be extended to six years in certain circumstances. |
| Impact on credit report | The bankruptcy record can remain on your credit report for up to 6 years from the date of the bankruptcy order. | The IVA will remain on your credit report for 6 years from the date it starts. |
What are the key advantages and disadvantages of bankruptcy?
For some individuals, bankruptcy can offer relief from financial pressure and provide an opportunity for a fresh start. However, as with any formal debt solution, bankruptcy comes with important considerations that should be carefully understood before proceeding.
Possible advantages of bankruptcy
- Income payments may last for a shorter period.
Bankruptcy income contributions typically last for three years, compared with around five years in an IVA.
- Lower upfront costs.
Bankruptcy currently requires a one-off application fee of £680. In contrast, an IVA typically involves a preparation of proposal fee that is paid prior to the commencement of the voluntary arrangement and the fee for this is typically in excess of £1,500.
- No creditor approval required.
Unlike an IVA, which must be approved by creditors, bankruptcy does not require creditor consent. Once a bankruptcy order is made, the process can proceed regardless of whether creditors agree.
Possible disadvantages of bankruptcy
- Equity in your home may be affected.
Equity in your home may form part of the bankruptcy estate and action may be taken to realise that value for creditors.
- Restrictions may apply.
There can be restrictions around running a business or acting in certain professional roles while bankrupt (e.g. you are unable to act as a company director). Although the majority of these restrictions only apply for a limited period, they may still affect both financial and career plans.
What are the key advantages and disadvantages of an IVA?
An IVA can offer a more manageable alternative to bankruptcy and greater flexibility around certain assets. However, an IVA comes with long-term implications and may not be a suitable option for all individuals struggling to manage their debt.
Possible advantages of an IVA
- May allow company directors to remain in their role.
Unlike bankruptcy, an IVA can allow company directors to remain in place and continue running their business, helping them maintain income and support repayments.
- Potential to retain certain assets.
Compared to bankruptcy, an IVA may provide greater flexibility around assets such as your home or vehicle, although this will depend on your personal circumstances.
For example, when considering your home, an IVA could enable you to remortgage towards the end of the arrangement rather than being required to sell it.
Possible disadvantages of an IVA
- Not all debts can be included.
Certain debts, including student loans, court fines and child maintenance payments, are generally excluded from an IVA to mirror their treatment in bankruptcy and may need to be managed separately.
- Long-term financial commitment.
An IVA agreement typically lasts for five years, meaning repayments need to be maintained throughout this time period. If repayments are missed and the arrangement can no longer be sustained, this could lead to further action being taken, including bankruptcy in some cases.
- Unexpected changes in income may affect your arrangement.
If your financial circumstances improve during your IVA, such as receiving a bonus, inheritance or large lump sum payment, you may be expected to contribute additional funds towards the arrangement (depending on the terms of your IVA agreement).
Is bankruptcy or an IVA right for me?
Bankruptcy is generally considered where there is little realistic ability to repay debts, while an IVA may suit those with regular disposable income who can maintain ongoing contributions and wish to retain certain assets.
Both options can result in eligible debt being written off but carry significant consequences, including impacts on credit files and financial flexibility. The most appropriate solution will depend on your income, assets, debt levels and future goals, so obtaining professional advice is important.
How can Cooper Associates Accountancy help?
Financial difficulties can feel overwhelming, and deciding between solutions such as bankruptcy and IVAs is rarely a straightforward decision. While both options are designed to help individuals regain control of their finances, understanding which route may be right for you can make a significant difference in both the short and long term.
At Cooper Associates Accountancy we take the time to understand your financial situation, explain the options available to you, and provide holistic guidance that is tailored to your individual needs. Our expert advisers will help you build a clear picture of the potential implications of each option, ensuring you have the information needed to make an informed financial decision with confidence and clarity.
To book a fee-free, no-obligation consultation get in touch today and discover how our teams can support you.
