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Tackling your debts

Are IVAs and bankruptcy the same as insolvency?

Posted 09 March 2016

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If you’re not familiar with some of the terms surrounding debt solutions, it can be a confusing subject. In today’s blog we’re looking at IVAs, bankruptcy and insolvency and how they relate to one another.

When it comes to debt, and finance in general, there can be a lot of jargon and unfamiliar terms to get your head around. It’s not surprising then that you sometimes end up wondering what a certain term means and whether it’s different from something else… and if so, how?

Well don’t worry, because we’re always here to clear up any confusion or answer any questions you have about the debt solutions we refer to – just use the options to the left if you’d like to speak to an advisor about any of them in detail.

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In this blog we’re going to look at two solutions, Individual Voluntary Arrangements (IVAs) and bankruptcy and explore whether they’re the same as insolvency. 

How do IVAs, bankruptcy and insolvency relate to each other?

First of all, insolvency is a type of catch-all term that means that you’re unable to pay your debts back – or at least at the rate that was originally agreed to when you took the credit out. Looking at a formal insolvency procedure is a formal way of admitting that you can’t repay your debts and that you’re wanting to tackle the problem.  

In England, Wales and Northern Ireland there are three main forms of personal insolvency all of which can help people tackle unmanageable debt, depending on their personal circumstances.  They are bankruptcy, Individual Voluntary Arrangements (IVAs) and Debt Relief Orders (DROs). So bankruptcies and IVAs are two formal ways to deal with insolvency and get out of debt.

Scotland has its own forms of insolvency, which include sequestration, Trust Deeds and Minimal Assets Process (MAP).  You can find out more about these on our Scottish debt solutions page

Should I avoid a formal insolvency procedure?

Starting a formal debt solution to deal with insolvency, although it may seem daunting, can sometimes be the best course of action. If you went down the bankruptcy or IVA route (with an IVA your lenders would have to agree to the offer of payment that you’re making) the interest and charges that have accrued on your debt throughout the plan would be written off at the end. Your income and expenditure would also be carefully assessed to make sure that anything you paid towards your debts was affordable. 

Also, these solutions take into account that you would never be able to pay all your debts back in a reasonable amount of time which is another benefit to those grappling with unmanageable levels of debt. Importantly, once your bankruptcy or IVA is over, your debts would be written off. So both bankruptcy and IVAs would allow you to pay something back towards your debts as well as look forward to a debt-free future. 

When you explore the advantages of IVAs and bankruptcy you start to see that a formal procedure to deal with insolvency is not always something to be avoided – because it can allow you to make a fresh start, financially speaking. Which solution is best for you just depends on your personal circumstances. Let’s have a look at the differences between the two solutions and how you can find out which one is right for you. 

The differences between IVAs and bankruptcy

There are a number of important differences between these solutions, one of which is how long they last.  An IVA usually lasts for five to six years, whereas bankruptcy normally lasts for one (you will be discharged from bankruptcy after one year, but may have to pay into the bankruptcy for three years). 

One of the biggest differences between the two is that with an IVA you must make regular, affordable payments towards your debts for the life of the IVA.  These payments are calculated to allow you enough money to live on, and you only have to pay what you can afford towards your debts, unless you can offer a lump sum to try and settle your debts all in one go. With bankruptcy, the Trustee would look into your finances and determine whether or not you could afford to pay anything in. If your income is made up only of state benefits then you wouldn’t need to pay anything in at all. 

In an IVA you don’t usually have to sell your assets – such as your home (if you are a homeowner).  By contrast, in bankruptcy the Trustee will usually sell your assets, including your home if there is equity in it. 

On the other hand, bankruptcy and IVAs tend to affect your credit rating in the same way. Starting either solution, would unfortunately, have a negative effect on your credit history and bring your score down. This means that it may be more difficult for you to obtain credit in the future, or that borrowing may be more expensive than it would have if you had not become insolvent. Bankruptcy or an IVA would stay on your credit file for six years from the date that they started. 

If you declare yourself insolvent your details are recorded on a public register which you can see here.  

Which one is best for you?

Hopefully, that’s cleared up exactly what the terms IVA, bankruptcy and insolvency mean and the differences between them. IVAs and bankruptcy are not the only ways of dealing with insolvency, and which one is appropriate for you depends on your circumstances and, sometimes, where you live. 

It’s a good idea to look into the terms around unmanageable debt so that you feel you’ve got a grip on the terminology, but it’s even more important that you get some professional advice. The Money Advice service does exactly what it says on the tin, and of course our experienced debt advisors are waiting for your call – if you have any further questions about how any of the above works, just get in touch. 

 

 

 

 

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.