Dealing with unmanageable debt can be overwhelming, but there are formal solutions available to help you regain financial stability. Two of the most common options are Individual Voluntary Arrangements (IVAs) and bankruptcy. Both offer a structured way to deal with debt, but they have key differences that may make one more suitable than the other depending on your individual circumstances. This guide will compare IVAs and bankruptcy to help you determine which might be the better choice for you.

What is an IVA?

An Individual Voluntary Arrangement (IVA) is a formal agreement between you and your creditors to repay a portion of your debt over a fixed period, typically five to six years. It is a legally binding solution managed by an Insolvency Practitioner (IP). Once an IVA is in place, creditors can’t take further legal action against you, and interest on your debts is usually frozen. Once your IVA ends, any remaining eligible debt is written off. 

IVAs are only available to residents of England, Wales and Northern Ireland, so if you live in Scotland, you may want to consider a Protected Trust Deed (PTD). This works in a similar way to an IVA but typically lasts four rather than six years. 

What is Bankruptcy?

Bankruptcy is a legal process that writes off most debts and provides individuals with a fresh financial start. It is typically suitable for those who have little to no disposable income and are unable to repay their debts. 

Bankruptcy usually lasts 12 months, after which most debts are discharged. However, in some cases, individuals may be required to make payments towards their debts for up to three years if they have a surplus income, known as an Income Protection Agreement. The Scottish equivalent to bankruptcy is sequestration which is very similar, although the application process and fees are slightly different. 

Key Differences Between IVA and Bankruptcy

If you’re wondering whether an IVA or bankruptcy would be best for you, there are a few key differences to consider: 

Debt solution	IVA	Bankruptcy
Duration	5-6 years	12 months
Credit impact	Stays on credit file for 6 years	Stays on credit file for 6 years
Fees	Can vary and is usually part of your monthly payments	£680 upfront
Monthly payments	Yes, based on affordability	Maybe, if you have surplus income
Asset protection	You may keep your home and car	Assets may be sold to repay debt
Legal status	Legally binding agreement	Court-declared insolvency
Public record	Listed on Insolvency Register	Listed on Insolvency Register and advertised in the Gazette
Debt write-off	Remaining debts which were included in an IVA are written off after IVA payments are completed	Eligible debt written off once discharged from bankruptcy

Pros and Cons of IVA vs. Bankruptcy

IVAs and bankruptcy each have their advantages and disadvantages, so it’s worth considering both before making a decision. 

Pros of an IVA

• Allowed to keep your home and certain assets.
• Fixed, manageable monthly payments.
• No direct interaction with creditors.
• Interest and charges are frozen.
• Legal protection from creditors

Cons of an IVA

• Lasts longer than bankruptcy (typically 5-6 years).
• Requires regular payments, which may be difficult for some.
• May have to pay windfalls into the IVA.
• Not all debts are included, such as student loans, court fines and TV licence arrears.

Pros of Bankruptcy

• Most debts are written off after 12 months.
• No ongoing monthly payments if you have no disposable income.
• Can be a quicker path to financial recovery.
• Provides a fresh start without ongoing financial commitments.

Cons of Bankruptcy

• You may lose valuable assets, including your home and car.
• It is publicly recorded and can affect employment in certain industries.
• Some debts are not included, such as student loans and mortgage payments.
• May restrict access to certain financial products for several years.

Who Should Consider an IVA?

An IVA may be a suitable solution if:

• You have at least £6,000 in unsecured debts
• You can afford regular repayments but need them to be more manageable
• You want to protect your home and other assets
• You have a stable income that allows you to meet payment terms.

Who Should Consider Bankruptcy?

Declaring bankruptcy may be a better option if:

• You have little to no disposable income and cannot commit to regular repayments
• You have few valuable assets that need protecting
• You need a quick solution to get out of debt.

Getting Advice on IVA or Bankruptcy

Deciding between IVA or bankruptcy is a significant financial decision that should be made with professional guidance. An Insolvency Practitioner or a debt adviser can assess your situation and recommend the best course of action.

If you’re unsure about whether IVA insolvency or bankruptcy is right for you, you can get free debt advice from MoneyHelper. Alternatively, get in touch with our debt experts who can help you choose the right path based on your financial circumstances.