In some cases, when debt problems become too large to be dealt with alone or by using debt solutions such as debt management plans, it might be time to consider an IVA or bankruptcy. But what are they and how can they affect your financial future?
IVA and bankruptcy will stop your creditors chasing you for payment of your debts.. Additionally, both options can result in writing off most, if not all, of your debt. However, this can come at a price. Having an IVA and Bankruptcy will severely impact your credit file, and your name will be added to the Individual Insolvency Register until three months after the bankruptcy or IVA has ended.
Bankruptcy is an insolvency option that is generally considered a last resort for those that are unable to pay the money that they owe to creditors. To be made bankrupt, you must have debts of at least £5,000.
Bankruptcy may not only have an impact on your financial future but also your current situation. If you own a home and have equity in it, the official receiver dealing with your bankruptcy may make you sell it to pay off some of your debt. You may also lose your vehicle and other assets if they are of high enough value and you don’t need them to do your job.
In terms of your financial future, bankruptcy will stay on your credit file for 6 years and be visible to all lenders including banks, mortgage lenders and utility companies. This means that it is unlikely that you will be accepted for credit while bankrupt. Bankruptcy can sometimes affect your job if you work in finance or are the director of a company. It is important to keep this in mind when considering bankruptcy.
The Pros & Cons of Bankruptcy
As with all debt solutions, there are advantages and disadvantages to bankruptcy.
Advantages of bankruptcy;
- It includes all unsecured debts.
- Interest is frozen (unless you pay your debts in full, then you may have to pay statutory interest).
- After 12 months, all debt is written off, and creditors will take no further action.
- If you are required to make payments, it will be at an affordable level for a 3 year period (4 years in Scotland).
- Many people find that bankruptcy is the quickest and cheapest debt solution.
- In England and Wales, you can make the application online, and you can pay the fee in instalments.
Disadvantages of bankruptcy;
- Your employment may be affected by bankruptcy. Be sure to check your employment contract!
- If you own property or any other assets of value, they may be sold.
- Bankruptcy fees are £680 (£647 in NI, £200 in Scotland).
- You will appear on the public Individual Insolvency Register/Register of Insolvencies whilst bankrupt, and the bankruptcy will appear on your credit file for six years.
- There may be other restrictions; you can find these on the government’s website.
What Is The Cost Of Bankruptcy?
The initial fee for bankruptcy in England and Wales is £680; this is broken down into £550 as a deposit and £130 adjudicator fee. You can pay this in instalments, but you would need to pay the whole amount before the process begins. If your application for bankruptcy is declined, your deposit of £550 will be returned.
If you choose to, you can pay in full and by cash at any Royal Bank of Scotland Branch. You can also pay by instalments if you apply and pay online here. Before you do so, make sure that you get advice from a professional. Although Debt Movement does not administer bankruptcies, we understand how hard it is to deal with debt and our expert guides are here to help you find the best solution to your debt problems and get you on the road to financial freedom.
IVA – Individual Voluntary Agreement
Before applying for bankruptcy, most people consider an IVA as a debt solution. An IVA, or Individual Voluntary Agreement, is an agreement with your creditors to pay back all or part of your debt in regular payments to an insolvency practitioner. It is a legal process offering protection against your creditors asking for more money than agreed in the IVA.
Similar to bankruptcy, when you enter into an IVA, your name will be added to the Individual Insolvency Register until 3 months after the agreement has ended and will remain on your credit file for 6 years from the approval of your IVA. You may find it very difficult to get credit whilst in an IVA and you must obtain permission from your insolvency practitioner before requesting credit of over £500, unless it is for household goods or utilities.
What Are the Advantages of an IVA?
- An IVA will stop further interest rates and charges from being added to your debt.
- The number of monthly repayments is fixed. Usually at 60 or 72 payments.
- Here at Debt Movement, your IVA will be supervised by a licensed Insolvency Practitioner.
- An IVA is a legally binding contract, and all creditors must adhere to its terms. It awards you legal protection against any further creditor action.
- That’s right, no further contact from unsecured creditors!
What Are the Disadvantages of an IVA?
- The default registered at the start of your IVA will stay on your credit file for six years after approval, so your credit rating can be affected.
- You may be required to release equity from your property.
- Your IVA will be listed on the Individual Insolvency Register.
- If your IVA fails, creditors can request the Supervisor to petition for your bankruptcy.
- You need 75% of voting creditors to approve. We will negotiate with creditors on your behalf if they reject your proposals.
The Key Differences between IVA and Bankruptcy
- Upfront Cost – You must pay your bankruptcy fee upfront, whereas an IVA includes its fees in your monthly payment.
- Your home – If there is equity in your home when you apply for bankruptcy, you may be forced to sell your home to repay your creditors. With an IVA, you are unlikely to lose your home but may be asked to remortgage in your final year of the IVA to release any equity to repay your creditors.
- Duration – You would usually be discharged from bankruptcy after 12 months as long as you kept to all of the terms and conditions, although you may need to make payments for 3 years, whereas an IVA will usually last for 5-6 years. However, both will remain on your credit file for 6 years.
There are specific requirements when applying for an IVA:
- You must have a minimum of £5,000 of debt.
- You must owe to at least two creditors.
- You must have a surplus income of at least £85 per month.
- You must be over 18 years of age.
Is an IVA Worth It?
If you are being chased by creditors, debt collection agencies or bailiffs and cannot afford to meet the required payments, an IVA may be the debt solution for you. As a legally binding agreement, once approved your creditors can no longer request more money from you than has been agreed in the IVA. Creditors will accept that you will only repay part of the debt and you are only required to make payments whilst the IVA is in place, usually 5-6 years.
You can read more about IVA and bankruptcy on our website or call us today to talk to one of our friendly and impartial guides about your financial circumstances. They will help you to understand each debt solution so that you can decide which is right for you.