Lawrence O’Hara explains key differences between the two processes, and the impact of each on the individual.

Individual voluntary arrangements (IVAs) were originally introduced as an alternative to bankruptcy. Though the two processes have general similarities, significant differences become apparent on closer inspection.

Both are legally-binding procedures that involve the repayment of creditors as far as is possible, with any remaining debt being written off at the end of the term. Additionally, neither process protects a debtor’s credit rating, which is negatively affected for six years or more.

So, what are the main areas of difference between these two procedures?

Cost

The initial and ongoing costs of an IVA are taken as a pre-agreed proportion of monthly repayments. They are calculated by the insolvency practitioner dealing with the IVA, and are factored in to the repayment proposal put to creditors.

In contrast, a debtor must include payment for the cost of bankruptcy when they make their application, and this is taken when the bankruptcy order comes into force.

Loss of home

A major concern for homeowners in serious debt is the potential loss of their home. An IVA may require the debtor to release equity in their property during the last year of an IVA, but it is less likely they will have to sell their home when compared with bankruptcy.

On being made bankrupt, a debtor must hand over control of their assets to the trustee, who decides whether or not the home should be sold for the benefit of creditors. In some cases, there may be insufficient equity in the property to make this worthwhile.

Amount of debt repaid

An IVA repays creditors using a debtor’s disposable income, once all their essential living costs have been taken into account. Creditors generally receive a greater return from an IVA, as opposed to bankruptcy, where circumstances can prevent any monthly income contributions being made, or possibly for a shorter time period.

Duration

The duration of an IVA is generally five to six years. If a debtor is unable to release equity in their property during year five, they may need to contribute for a further 12 months.

Debtors are typically discharged from bankruptcy after 12 months have passed, as long as they have met all of the terms and conditions. If an income payments agreement (IPA) is in place, they may need to contribute to their debts for a further two to three years, however.

Publicity

Although both processes are noted in the Individual Insolvency Register, which is available for public view, bankruptcy is also advertised in The Gazette.

It is more likely, therefore, that bankruptcy will be noticed by employers, or other people known to the debtor.

Employment

A debtor’s employment could be affected by either process, but there is a greater chance of an employer becoming aware of their employee’s insolvency if they enter bankruptcy rather than an IVA.

This is due to the additional publicity given to bankruptcy, but in either case, a debtor’s role and terms of employment contract will dictate whether or not their job may be affected.

In some instances, a contract of employment will state whether insolvency is grounds for disciplinary action or dismissal. Professionals working in law and accountancy, in particular, can be affected, and it may be a condition of their licensing body that they have no debt issues. 

Overall, bankruptcy carries with it a greater risk of employment being affected – through the loss of a job, or perhaps being prevented from further advancement.   

Getting a bank account

When a debtor enters an IVA and the bank is one of their creditors, the bank may have the ‘right to offset’ their debt against the bank account, if there is a credit balance available. For this reason, it may be advisable for the debtor to open a new account prior to the IVA commencing, so that wages can be paid in and ongoing bills paid.

In the case of bankruptcy, the bank will freeze the debtor’s bank account, so that any credit balance can be claimed by the trustee for the benefit of creditors. This can cause an issue if the account is jointly-held, so it’s advisable for the joint holder to open a new account prior to the bankruptcy procedure commencing.

It may also be preferable for the person entering bankruptcy to open a new account if possible, to ease their own financial management once the bankruptcy order takes effect.

In both cases, a debtor’s access to a new bank account will be limited. Some banks offer basic accounts for those in serious debt, however, allowing money to be paid in but preventing access to credit.

Credit file

An IVA will stay on a debtor’s credit file for a period of six years. If the IVA lasts for longer than six years, it remains until the end of its term. This restricts the debtor’s long-term access to credit, as even after the six-year period has elapsed, they may still experience reluctance from lenders, unless unfavourable terms are accepted.

Bankruptcy also remains on a credit file for six years, and in a similar way, adversely affects the bankrupt’s ability to secure credit or any other form of borrowing. In both cases, however, it’s possible to rebuild a credit rating over time.

Whether the IVA or bankruptcy route is chosen largely depends on individual circumstances but, initially, it is often a debtor’s own perception of bankruptcy that makes an IVA seem the more attractive option.

About the author

Lawrence O’Hara is manager at Begbies Traynor Group in Belfast, helping individuals with personal debt problems through Northern Ireland Debt Solutions.