What is an IVA? An IVA is an Individual Voluntary Arrangement which gives you the facility to set up a formal agreed payment plan with your creditors. In order to be eligible you must have debts of over £15000 that you cannot afford the repayments on.

What is Bankruptcy? Bankruptcy is an order from a court that means your finances are controlled by the Official Receiver and there are a series of things you cannot do when you have been made bankrupt. This also means your bank account will be frozen and you will likely lose your home (if you’re a home-owner)

What debt solution is better for you? That’s a tough call that only you can make with the help of some serious debt advice. Overall an IVA seems to offer you much more freedom in having some control over your assets, in my humble opinion (but I’m no financial advisor). When you are bankrupt you can be made to hand over everything that is not deemed essential to your living (eg work items or household items like clothes). With an IVA you can still operate your bank account and have your wages paid in as normal. You still have to provide detailed information on all your income and expenditure and then you will be told how much you have to repay to your creditors. If you do not keep up with this you could be subject to bankruptcy proceedings.

The time in which you will be paying the debt back does vary between these two. The IVA is usually over 5 years whereas the bankruptcy order means you will usually be paying the debt for 3 years (although the bankruptcy order may only last one year, the agreement to pay is 3 years). Although you will be paying for less time with the bankruptcy order, it does affect you for longer as you can not be company director, Managing Director, MP or Judge and you will have severe difficulty in obtaining a mortgage (especially after the sub prime credit crisis in America).

So overall, if you can have an IVA over a bankruptcy order then this would seem the better option for the majority of circumstances but this depends largely on your debt.

Before declaring yourself or business bankrupt it is worthwhile seeking debt counselling to make sure it is the right option.

Provided the directors of the company have and continue to act responsibly, voluntary liquidation may be an option for debts over £50,000. Although the company will cease to trade, the directors won’t be held financially culpable. If the company has no assets it will be necessary for money to be set aside to cover the practitioner fees.

If there only have a few creditors it may be possible to reach an ‘informal agreement’. It is similar to an IVA, but requires the agreement of all creditors. It is necessary that the company or individual has the spare money to offer creditors, but may result in a significantly reduced level of payment.

An IVA offers a less intrusive alternative to bankruptcy. You make a payment to creditors for a period of 60 months. It allows you to keep your home and maintain your professional status. Your insolvency isn’t printed in the local press.

Further Advice:
If you’d like to talk to someone about debt solutions and alternatives to bankruptcy, we’d recommend contacting an expert for free advice. Dropping into your local Citizens Advice Bureau or calling a company like Debt Free Direct is a good start. There’s also plenty of UK based forums where others going through IVA and bankruptcy talk about their experiences which could be a great place to get involved and ask some questions to people who are actually going through it before you make up your mind.

If you’re in debt, it’s easy to be seduced by IVA advertisements offering debt help and an easy way out, but be warned, these companies are looking to make money from your frustration. There is no easy way out of debt or the possibility of bankruptcy , you have to consider all your incomings and see exactly what you’re wasting and where you can make cutbacks. You need to see what interest you are being charged and work out clearly who you owe money to. No company is going to find a ‘little known legal loophole’ to give you a cause to not pay. These companies are just trying to reel you in to pay for their services.

If you are honest with your creditors when you find yourself in financial difficulty, they are far more likely to treat you fairly. You may find yourself paying a reduced rate of interest whilst a debt is cleared, and even be able to offer a reduced lump sum to clear it sooner. Hard work is the key to paying off debts; not wishing on stars and wasting time on schemes like this.

There are some excellent debt charities, such as CCCS, who offer free debt counselling and advice. They will help you work out a debt-repayment plan for free. If you’ve run up debt, you have a simple moral obligation to tighten your belt and pay it off.

It is possible that an IVA could right off 75% of your unsecured liabilities, but it is likely that the people would stand to benefit from this kind of reduction are better favoured by bankruptcy anyway.

Those who have a relatively low paid job and no property could almost certainly get away with paying about 25% of their debts plus insolvency practitioner fees – still more than 25% though. Creditors would be happy to get anything from this debt and have probably virtually written it off in the first place.So rely on ISA savings or speak to a debt adviser.

If you have a well paid job, home etc you are highly likely to have to repay most of what you owe. Whilst an IVA does potentially allow you to right off some debt, it is more of means of returning order to your finances as it helps you balance the books. The IVA will end after 5 years and your credit rating will be completely clear after 6 years providing you with a fresh start.