Why would I opt for an IVA instead of bankruptcy or a DMP? Can you confirm the main differences between these options?

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Bankruptcy is a formal insolvency route for individuals with serious debts they cannot pay. It’s often the last resort for people in debt and is usually applied when no meaningful alternative can be offered to creditors.

You can petition for your own bankruptcy or one of your creditors can apply for a bankruptcy order against you if you cannot pay what is owed to them. The Enterprise Act 2002 now allows some bankruptcies to be discharged within one year and any proof of reckless spending may result in a bankruptcy period of between 2 and 15 years.

Although Bankruptcy is right for some, the decision to enter into bankruptcy should not be taken lightly – life will not be the same for some years to come, particularly when rebuilding your credit rating and, possibly, career.

Other points to consider when thinking about bankruptcy as an option to your debt problems include:

• All your assets, apart from those required for a basic standard of living, will be sold. This may include your house.

• You will not be allowed to obtain more than £500 of credit unless you first disclose that you are a bankrupt.

• Any income you have in excess of that needed for your basic needs will have to be paid to your creditors for up to 3 years.

• Your job may be at risk: certain trades and professions will not allow you to work when bankrupt.

• Your credit rating will be affected (probably for some time after your bankruptcy ceases) and there may be other restrictions, such as having your bank and credit card accounts closed.

• Your bankruptcy will be advertised in local newspapers.

When comparing bankruptcy to an IVA as a solution to your debt problems, there are several key distinctions which we have highlighted below:

• An IVA is a legal process which enables you to significantly reduce the amount of debt you owe with the acknowledgement and agreement of your creditors. Furthermore, once an IVA agreement is in place, creditors must freeze any interest and charges and cease any other legal proceedings they may have commenced or be considering.  If you are able to keep up your monthly payments through the IVA, within 3-5 years (normally), you will be debt free.

• In an IVA you will have the assistance of your advisor (supervisor) and he/she can arrange to vary payments if circumstances change, in bankruptcy, a Trustee will handle all distribution of your assets, without any discretion.

• Unlike bankruptcy, an IVA is not publicised in newspapers.

• Bankruptcy can affect some careers, which is much less likely in the case of taking up an IVA. With an IVA you can still become a company director, and do not have to inform your employer of your financial situation. If electing for bankruptcy, this would not be an option.  Your bankruptcy would be public knowledge and you would not be permitted to practice certain professions or become a company director.

• With regards to the security of your home, if electing for bankruptcy whilst owning your own home, either solely or jointly, your personal ownership will be passed on to the Official Receiver or Trustee. Although this doesn't mean you will be evicted straight away, it does mean that unless you can afford to buy your interest back, the house will have to be sold. This action will be taken by court order if you do not do it voluntarily. In bankruptcy you will be given one year's grace during which time you can continue to live in your house as long as you continue to pay the mortgage. After the year is over you will either have to buy back the Official Receiver's interest or the home will have to be sold.

The key differences between a Debt Management Plan and an IVA are:

• Unlike an IVA, a DMP is not legally binding. Your creditors still have the option to continue with court proceedings against you.  Despite this, if we can demonstrate that you are acting responsibly and meeting your new payment criteria, this will be looked upon favourably and creditors may re-consider any court action. 

• As with an IVA, once in a DMP, we would advise that all calls and letters from creditors be re-directed to our team here and we will then liaise with them on your behalf.

• Unlike an IVA, although we would request that creditors cease from charging interest on your outstanding debt, this is not a compulsory requirement and sometimes creditors refuse.

• As with an IVA, a DMP this will not be made public knowledge and will not be announced in the local papers.

• As with an IVA, whilst in a DMP you will have direct access to your advisor to help you with any queries you may have.  They are usually available until 9pm Monday to Friday.