What Is The Difference Between Bankruptcy And An IVA?
Bankruptcy and an Individual Voluntary Arrangement (“IVA”) are two different procedures set out in the Insolvency Act 1986 for individuals who are struggling to pay personal debts and are insolvent.
Understanding the difference between these two options can be helpful for people considering how they might be able to grapple with their personal financial crisis.
Bankruptcy Insolvency Procedure
Bankruptcy is a process set out in Part IX of the Insolvency Act 1986 overseen ultimately by the Court that has overall control. It is usually considered as a last resort for individuals who are unable to pay their debts.
It typically will entail selling the individual’s assets to repay their creditors, taking into account the statutory order of payment in insolvency proceedings. It is administered by an Insolvency Practitioner referred to as the Trustee In Bankruptcy.
When an individual is Bankrupt they are subject to various Bankruptcy restrictions such as limitations on their ability to obtain credit without informing such a provider they are an undischarged bankrupt. Upon receiving their discharge from Bankruptcy these restrictions are removed and they can in effect restart their financial life afresh. However, it still can be a difficult process and a record of their Bankruptcy is typically retained on the files of credit rating agencies for 6 years.
Individual Voluntary Arrangement Insolvency Procedure
An IVA is an insolvency procedure set out in Part XIII of the Insolvency Act 1986 and is an agreement between the Debtor (the insolvent individual) and their creditors. It is in effect a statutory contract that facilitates an arrangement for individuals in the UK to pay a portion of their debts over a set period of time, typically 5 years.
It is a legally binding agreement between the Debtor and their creditors. Although there are other procedures in the Insolvency Act 1986 such as Debt Relief Orders which can be deployed for the benefit of enabling an individual to restructure and even write off debts they cannot repay, an IVA is the major alternative procedure to Bankruptcy that is available when an individual has debts over £30,000.
An IVA is an agreement that might not restrict the individual from offering terms such as being able to keep certain of their assets. A common formula to an IVA is to put in place an agreement for the Debtor to make manageable monthly payments towards their debts. Ultimately it is down to what can be negotiated with creditors.
In an IVA the Insolvency Practitioner overseeing it is known as the Supervisor.
At the end of the IVA period, the remaining debt is forgiven and the Debtor can thereafter move on with their financial lives.
Credit Rating
Bankruptcy might be thought to have a severe impact on an individual’s credit rating and their ability to obtain credit in the future. Whilst an IVA may provide a more manageable solution for those who are able to make regular payments towards their debts, it will also be recorded on the individual’s credit files.
