When dealing with serious debt in the UK, two options that are often researched are Individual Voluntary Arrangements (IVAs) and bankruptcy. Both are formal debt solutions governed by law, but they work in very different ways and are used in different situations.
This page explains how IVAs and bankruptcy typically work, the key differences between them, and the types of circumstances in which each option is commonly considered. It is intended to provide general information only and does not offer advice or recommendations.
What Is an IVA?
An Individual Voluntary Arrangement (IVA) is a formal agreement between an individual and their creditors. A more detailed explanation of how an IVA works can be found here.
IVAs are arranged and managed by licensed Insolvency Practitioners. Once approved by creditors, an IVA is legally binding and sets out how much is paid, for how long, and what happens at the end of the arrangement.
In many cases, remaining unsecured debt is written off at the end of the IVA, provided the agreed terms have been followed.
What Is Bankruptcy?
Bankruptcy is a legal process that can be used when someone is unable to repay their debts and other solutions are not suitable or have failed.
When someone is declared bankrupt, control of their financial affairs is passed to an Official Receiver or a trustee. Certain assets may be sold to repay creditors, although some essential items are usually protected.
Bankruptcy typically lasts 12 months, but financial restrictions and credit file impacts can last longer.
Key Differences Between an IVA and Bankruptcy
While both options deal with problem debt, there are important differences in how they operate.
An IVA:
- Is a repayment arrangement
- Usually lasts several years
- Allows individuals to retain more control over assets
- Requires regular payments
- Depends on creditor approval
Bankruptcy:
- Is a legal insolvency process
- Usually lasts 12 months
- May involve selling assets
- Does not require creditor approval
- Can place restrictions on certain activities
In addition to IVAs and bankruptcy, some people also explore other formal debt solutions such as Debt Relief Orders (DROs). DROs are designed for individuals with low income, few assets, and lower levels of debt, and they work very differently from both IVAs and bankruptcy.
The impact on employment, housing, and finances can vary depending on the option used.
Situations Where an IVA Is Commonly Considered
An IVA may be explored in situations where:
- The individual has a regular income
- There are multiple unsecured debts
- Bankruptcy is not preferred due to employment or asset concerns
- Creditors are likely to approve a repayment proposal
Each IVA proposal is assessed individually and outcomes can vary.
Situations Where Bankruptcy Is Commonly Considered
Bankruptcy is more commonly explored when:
- Debt levels are unmanageable
- There is little disposable income
- Other solutions are unsuitable or unavailable
- A quicker legal resolution is needed
Bankruptcy is not appropriate in all situations and can have serious long-term effects.
Impact on Credit Files and Financial Records.
Both IVAs and bankruptcy are recorded on credit files and public registers. In some situations, unpaid debts can also lead to court judgments, which may affect how debts are recovered.
These records typically remain visible for several years and can affect access to credit, mortgages, and some financial products. The length and impact depend on the solution used and individual circumstances.
Important Information
This website provides general information only and does not offer legal, financial, or debt advice. IVAs and bankruptcy are regulated debt solutions and suitability depends on individual circumstances. Always seek advice from a qualified, authorised professional before making decisions about your financial situation.