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Bankruptcy v IVA, the answers to questions that most worry consumers

Friday, 5th November 2010

The latest insolvency figures show a small reduction in the number of people going insolvent through bankruptcy and Individual Voluntary Arrangements (IVAs), Mike Thomas, aka The DebtWizard, looks at how bankruptcy compares with an IVA, answering the questions that most worry consumers;

What debts can be included and will they be cleared?

Bankruptcy - At the time of going bankrupt all your unsecured debts, such as credit and store cards, personal bank loans, overdrafts, catalogue debt are cleared. Also cleared is any claim from the mortgage lender if after repossession of the home there is still money owed if the sale proceeds were not enough, i.e. the shortfall. Some people say that the debts are not erased but the obligation to repay them has been removed. In any event you no longer have to pay them back. What are not cleared are secured debts such as your current mortgage on your home, court fines and debts arising from fraud or maintenance payments.

IVA - The same debts as above can also feature in an IVA and once completed satisfactorily then any remaining debt will be legally written off so lenders can no longer demand payment.

Can I keep my house?

Bankruptcy - If you own your home then the Official Receiver (OR) who oversees a bankrupt’s financial matters, will look at their share of any equity, that is the difference between the value of the home and the mortgage outstanding. If the equity is low or negative then it is possible for the bankrupt or a friend or family member to purchase the OR’s interest in the home for a nominal sum. Sometimes this can be as little as £1 plus a small admin fee so yes, in certain circumstances a bankrupt can still keep their home.

IVA - Again if the equity is low or the home owner is unable to re-mortgage their share on year four of a five year arrangement then they can often extend their payment into the IVA for six to twelve months to cover this. Most people usually keep their home in an IVA.

Do I have to make any payments and if so how long for?

Bankruptcy - Usually 36 months if it is deemed that you have at least £100 or more of any Disposal Income (DI).The DI is worked out after going through your normal and reasonable expenditure.  Even then usually only around 60% – 70% of this will be taken.

IVA - The payments are normally for 60 months, two years longer than bankruptcy, and the individual will pay 100% of their DI, which is reviewed annually to see if contributions can be increased. Lenders also require 50% of any net overtime or income above what is stated in the IVA proposal, not a reduced sum as in the bankruptcy.

Do I keep my car/motorbike?

Bankruptcy - If the vehicle is paid for and nearer the value of £2,000 or above then it is possible that this may be taken and sold. However if it is needed to get to and from work which generates an income then it is possible you can keep the vehicle. Mobility vehicles are excluded. ORs have different views upon the value of the car; some will have a higher threshold of say £2,000 - £2,500 for which you can still keep the vehicle.  If it is on Hire Purchase (HP) the vehicle belongs to the lender and in the majority of cases can be kept provided the payments and type of vehicle are reasonable.

IVA - If the same HP criteria applies then you may be able to keep the car and when the HP payments cease you direct these payments into the IVA to boost the monthly contributions. If the vehicle is paid for and is of high value, e.g. £6,000 upwards then you may be required to sell the vehicle and purchase a cheaper one for say £3,000 and put the remaining sale proceeds into the IVA to boost the overall return to lenders. Remember, the IVA is for five years so a reasonable vehicle is required to see you through the arrangement.

What do I need to pay in fees?

Bankruptcy - The person going bankrupt has to pay a fee of £600, which is made up of a £450 Official Receiver's fee and £150 Court fee. If they can demonstrate that they are on benefits then they may be exempt or pay a reduced court fee.  This fee jumped a massive 25% from April this year, which many cannot afford.

IVA - Some IVA firms still charge up front fees but there are many that do not charge the consumer but take their fee from the contributions paid into the arrangement. These fees are set by the lenders that feature in the IVA and will be drawn over the term of the arrangement.

Will my name and address be advertised in the local paper?

Bankruptcy - Since the 6th April 2009 honest and co-operative consumer bankrupts have not needed to have been advertised in the local paper. However those bankrupts seen as un-co-operative or not to have revealed all their assets or liabilities may still be advertised in addition to any other cases that the Official Receiver feels warrants public interest.

IVA –These have never been advertised in the local paper. However, there is a public register that bankrupts go on until discharge, usually for one year, and in the case of IVAs, for the duration, usually, five years.

Do lenders have to agree to my bankruptcy or IVA?

Bankruptcy - No.

IVA - Yes, 75% of those lenders in value voting will be required to accept your proposal, once achieved then those that initially rejected it or who did not bother to vote will be legally bound by the arrangement.

An insolvency procedure is always going to be a big step so it is vital you seek professional advice as how best to manage any debt issues, need help,? If so then see our list of Helpful Organisations.

Further reading

DebtWizard guide to bankruptcy

DebtWizard guide to Individual Voluntary Arrangements (IVAs)


For no nonsense advice just submit the short form and Mike or one of his team will get back to you.

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