IVA vs bankruptcy: which is right for you?

What is the difference between an IVA and bankruptcy?

The main difference between an IVA and bankruptcy is control: in an IVA you keep your assets and make agreed payments to an insolvency practitioner, while in bankruptcy a trustee takes control of your assets and you are usually released from your debts after 12 months (GOV.UK on IVAs (opens in a new tab); GOV.UK on bankruptcy (opens in a new tab)).

An IVA is not a form of bankruptcy. It is a voluntary arrangement your creditors vote on, and once approved it binds all of them, including any who voted against (section 260 of the Insolvency Act 1986 (opens in a new tab)). Bankruptcy is an order: on your own application, an adjudicator at the Insolvency Service decides whether to make it (GOV.UK (opens in a new tab)).

Our guides explain how an IVA works and how bankruptcy works in full. The table below puts the two side by side for England and Wales.

Which costs more, an IVA or bankruptcy?

Bankruptcy costs £680 to apply for in England and Wales, while a protocol IVA has no upfront fee and instead takes its set-up and handling fees out of the monthly payments you make for 5 or 6 years (GOV.UK (opens in a new tab); key facts (opens in a new tab)).

The £680 is only what you pay to apply. In bankruptcy the official receiver also charges an administration fee, £2,390 when you apply yourself, which is paid out of your assets in the bankruptcy (Insolvency Proceedings (Fees) Order 2016 (opens in a new tab)). You can pay the £680 in instalments, but you cannot submit the application until it is paid in full.

In an IVA, your first monthly payments cover more of the fees than your debts, so if the IVA is cancelled early you may have cleared less debt than you expected, with no refund. Neither route is free, and what each really costs you depends on your income and what you own.

Ask any practitioner for the likely costs of each option in writing before you choose. SIP 3.1 (opens in a new tab) requires them to explain the advantages, disadvantages and likely costs of every option open to you.

Which affects my home more?

Bankruptcy usually affects your home more: the trustee can sell it or take a charging order if your equity is more than £1,000, while a protocol IVA does not make you sell or release equity and instead lasts 6 years rather than 5 if your equity is £10,000 or more (GOV.UK (opens in a new tab); key facts (opens in a new tab)).

In bankruptcy, your interest in the home returns to you after 3 years if the trustee has not dealt with it by then (section 283A (opens in a new tab)). A sale can be delayed for up to a year to arrange somewhere for children or a partner to live, and a partner may be able to buy your share. If you rent, your landlord might be told, but GOV.UK says you are unlikely to be asked to move if your rent is up to date.

In a protocol IVA, your equity is worked out as 85% of the home’s value less the mortgage and other secured borrowing (IVA protocol (opens in a new tab), paragraph 57). Very high equity, more than one property or a buy-to-let make a protocol IVA unlikely to suit you, and a different kind of IVA may be considered. Our pages on IVAs for homeowners and your home in bankruptcy go further.

How long does each last and stay on my credit file?

A protocol IVA lasts 5 or 6 years and bankruptcy usually lasts 12 months, but each can stay on your credit file for 6 years from the date it starts (key facts (opens in a new tab); GOV.UK (opens in a new tab)).

Bankruptcy ends automatically after one year unless the court suspends your discharge because you have not co-operated (section 279 (opens in a new tab)). Some records outlast it: the Gazette notice is permanent, though left out of search engine results after 1 year and 3 months, and your name usually comes off the Land Charges register, which mortgage lenders can search, after 5 years.

An IVA leaves the Individual Insolvency Register 3 months after it ends. Our guide to how long an IVA stays on your credit file covers borrowing during and after one.

Which is right for me?

Which is right for you depends on your income, what you own, especially your home, and whether you can keep up payments for 5 or 6 years, and a licensed insolvency practitioner must explain both, with their costs, before you choose (SIP 3.1 (opens in a new tab)).

The IVA protocol says a protocol IVA usually suits someone with a regular income other than benefits, debts of £7,000 or more, uncomplicated assets and no way to repay in full, who does not qualify for a debt relief order (IVA protocol (opens in a new tab), paragraph 9). The key facts warn it may not suit you if your debts are very low, you can only afford a small payment, or your income is mainly benefits.

Bankruptcy has no equivalent guide. GOV.UK asks you to check the other options and what happens when you become bankrupt before you apply. It ends sooner, but you give up control of your assets, and the restrictions on borrowing and running a company apply until discharge.

Some people suit neither. A debt relief order or a debt management plan may fit better, and our page comparing all the debt solutions in England and Wales sets them out. You can also talk it through with a free adviser.