Bankruptcy VS IVA – What’s the difference?
The following article outlines the differences between Bankruptcy and an Individual Voluntary Arrangement.
It also offers guidance on when individuals should consider filing for Bankruptcy or whether an Individual Voluntary Arrangement might be more suitable.
However, in all instances and throughout the article, we underpin our suggestions with the strong recommendation that a company director experiencing financial difficulties should consult an insolvency professional as soon as possible. An initial meeting will always be free and with the depth of their experience, it may be possible to recover a business experiencing financial difficulties. If there is a delay in seeking advice, pressure could mount on the company, which will restrict the options available to it and make the need for a formal insolvency/closure of the business more likely.
Chamberlain & Co have been established for over 20 years and liquidations and administrations have been core services throughout. We work very closely with clients, making the process as stress-free as possible, regardless of how complex the problem is. We have an in-house team of award-winning, dedicated professionals who specialise in insolvency, restructuring, rescue and business turnaround.
WHAT IS BANKRUPTCY?
Bankruptcy is a legal procedure that places the assets and debts of an individual under the control of a regulated professional. It is most often used by creditors, in cases where the debtor cannot / will not repay their debts.
It is also used by individuals in certain scenarios. For example, the debtor may not own property, be lowly paid and have no disposable assets to realise. In this sort of scenario, bankruptcy may ultimately be more beneficial for the debtor, as it will allow them freedom from their debts.
WHAT IS AN INDIVIDUAL VOLUNTARY ARRANGEMENT?
This is an agreement between debtors & creditors to repay money over a period of time – usually 60 months (but the time span can differ, depending on the circumstances). The monthly repayments are calculated on available funds after appropriate living costs from income have been deducted.
Whilst the details we’ve outlined here refer to a textbook IVA, the arrangement can take many forms, dependent on the circumstances. For example, third parties such as family members may advance funds to clear their relative’s debt through an IVA to ensure their relative avoids bankruptcy.
BANKRUPTCY VS IVA – WHAT’S THE DIFFERENCE?
Bankruptcy is a court process and is creditor-led.
An Individual Voluntary Arrangement (IVA) is an out of court agreement led by the debtor.
In a bankruptcy, the entirety of a debtor’s assets fall into the bankruptcy estate and it’s the trustees’ or the Official Receivers’ duty to sell all available assets until such time the debt is fully repaid.
In an IVA the creditors will expect the debtor to submit their best offer but the debtor may request that certain assets be excluded. This is usually in circumstances where the sale of certain assets will impact very negatively on the debtor and his dependents’ quality of life etc.
Most commonly, these exclusions are utilised to release equity from the debtor’s property without repossession proceedings, and should the IVA conclude successfully, the debtor may retain their home.
In a bankruptcy, it is likely that unless a third party can acquire the debtor’s interest in their property, the Official Receiver / Trustee will have to consider repossessing the property.
WHY CHOOSE BANKRUPTCY OVER AN IVA?
Bankruptcy brings an end to a situation that is incredibly stressful for clients. Declaring bankruptcy can alleviate that stress as it will mean the end of court proceedings, high court enforcement action (often referred to as bailiffs) and other similar processes.
If you do not have any assets, other than your income, it is likely a bankruptcy may be a better overall solution for you.
WHY CHOOSE AN IVA OVER BANKRUPTCY?
Bankruptcy removes a number of opportunities for individuals. Those working in the professions (legal and accountancy etc) will likely see the end of their career, as it is usually impossible for a bankrupt to continue to practice in these sectors.
An IVA, however, may allow you to continue to work. You may also retain the family home and can request that certain assets are excluded when it comes to asset realisation, although all such exclusions would need to be agreed with creditors.
CAN I DECLARE BANKRUPTCY WHILE IN AN IVA?
Yes. Circumstances can change over the lifetime of an IVA (generally 60 months) and the IVA may no longer be practical if there is a downturn in personal circumstances.
However, it’s important to bear in mind that the IVA is a contract between the debtor and their creditors and this contract is supervised by an Insolvency Practitioner (whose role is formally called “the Supervisor”).
Whilst the Supervisor’s primary role is to ensure both parties meet their responsibilities, they may be able to agree to a variation or similar alternative with your creditors, as opposed to bankruptcy, and you should always consult your Supervisor before taking steps to declare yourself bankrupt.
DOES AN IVA AFFECT YOU FOREVER?
The UK credit rating agency Experian states that:
“Your IVA will appear on your credit report for six years, starting from the date it was approved. The record won’t be removed if you finish your IVA earlier, but it will be marked as ‘complete.’”
However, a debtor with a current IVA in place still has access to financial products although interest rates/repayments may be higher.
Once the IVA has been fulfilled, a Certificate of Successful Implementation will be issued as evidence of release from the IVA contract.
HOW BADLY DOES AN IVA AFFECT YOUR CREDIT RATING?
An IVA can affect your obtaining credit in the future.
You may still be able to get some types of credit during the agreement – typically with low credit limits and high-interest rates. It’s worth remembering that applications for credit over £500 need to be approved by the insolvency practitioner managing your arrangement during the time the IVA is in operation.
You should also keep in mind that every credit application will impact your score so you should only apply for credit you really need or are likely to be approved for.
WHAT DO YOU LOSE IF YOU DECLARE BANKRUPTCY?
A bankrupt loses control over their assets, essentially.
By default, all assets remain with the trustee or the Official Receiver.
However, certain situations can be excluded. For example, in the case of jointly-owned property, only the bankrupt’s equity in the property can be realised.
If the bankrupt owns and resides at their primary residential home together with partners and dependants, this cannot be sold for 12 months from the date of the Bankruptcy Order by the Insolvency Practitioner (unless those involved wish for it to be sold sooner).
Pension funds accrued by the debtor will likely be excluded, along with clothes and furniture. In addition, a bankrupt can apply for consent to maintain a motor vehicle that is sufficient to meet their needs.
It’s vitally important that all assets are disclosed to the trustee or Official Receiver. Not disclosing a saleable asset may lead to fines or even a custodial sentence, best demonstrated by the proceedings brought against Boris Becker.
WHAT IS THE DOWNSIDE OF FILING FOR BANKRUPTCY?
Bankruptcy will appear on a credit report for six years, or until you’re discharged if this takes longer.
If you work in the professional sector (legal, accountancy etc), it will likely mean the end of your career as these professions are usually unable to employ bankrupt individuals.
It also means a loss of control of your assets. These are managed day to day by the trustee or Official Receiver.
Travel may be another area that is impacted by bankruptcy. Certain countries don’t allow a bankrupt individual to enter.
DOES BANKRUPTCY CLEAR HMRC DEBT?
Declaring bankruptcy clears all liabilities owed to HMRC up until and including the date the Bankruptcy Order is made. Any liabilities accrued after the date of the Bankruptcy Order have to be met by the debtor.
HOW DO I DECIDE BETWEEN BANKRUPTCY AND INDIVIDUAL VOLUNTARY ARRANGEMENT?
In bankruptcy, control of your assets is passed over to the Official Receiver or an Insolvency Practitioner, if one is appointed, who will decide how these assets are best sold for the benefit of your creditors.
In an IVA, you have the opportunity to put forward an offer of settlement, which is your best offer to repay the debt. You can request certain assets to be excluded or certain circumstances to be considered, and retain a degree of control over your assets, in line with the terms agreed with your creditors.
Bankruptcy is usually a much quicker process than an IVA. Bankruptcy is typically over within 12 months, although you may still be required to make payments for up to three years if you enter into an income payments agreement. IVAs are usually paid over a period of 5 to 6 years.
It is important to note that a bankruptcy can be extended indefinitely if you do not engage with the Official Receiver or insolvency practitioner as required.
In all instances, we recommend that any individual facing financial difficulties seeks out an Insolvency Practitioner to help them make this decision and to help them take the right path for their circumstances.
Any insolvency professional will be a licensed expert and regulated to dispense advice and any initial consultation will be free.
Chamberlain & co offer a discreet, free initial consultation and can be held via telephone, face to face meeting, or through a digital medium such as Microsoft Teams. All matters are discussed confidentially, and the team is used to making discrete enquiries when working with you to produce a strategy to resolve your issues.
As with all insolvency practitioners, Chamberlain & Co are committed to delivering the best advice in all scenarios, and the team’s work has been recognised regularly at the Yorkshire Accountancy Awards and Turnaround, Rescue and Insolvency Awards.
You can contact us by calling 0113 242 0808; by emailing us at advice@chamberlain-co.co.uk or by completing our online contact form here.