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Wednesday, 29th October 2014
We look at how an Individual Voluntary Arrangement (IVA) compares with bankruptcy, answering the top 10 questions that most worry consumers, they are in no particular order;
1. What debts can be included in a bankruptcy and IVA 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. This provided you have not signed a Deed of Acknowledgement (DOA). In bankruptcy 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.
2. Can I still have a bank account when bankrupt or in an Individual Voluntary Arrangement (IVA)?
As a ‘financially challenged’ person, i.e. a bankrupt or in an IVA, you will only be allowed to have a basic bank account, not one with a cheque book or overdraft facilities.
3. Can I keep my house in a bankruptcy or IVA?
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 £100 plus a small admin fee so yes, in certain circumstances a bankrupt can still keep their home. This has to be dealt with within three years of your bankruptcy.
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. Recently the new IVA Protocol 14 was launched which gives further guidance on how to deal with equity in the home during an IVA. Most people usually keep their home in an IVA provided they have kept up their mortgage repayments.
4. Do I have to make any payments in my bankruptcy and if so how long for?
Bankruptcy - If it is deemed that you have at Disposal Income (DI) after being assessed by the Official receiver (OR) then yes you will make payments under an Income Payment Agreement (IPA) towards the administration of your bankruptcy for a period of 36 months. The DI is worked out after going through your normal and reasonable expenditure. If you do not get an IPA in your first 12 months and are then discharged then you will not be request to make an IPA
IVA - The payments are normally for 60 months, two years longer than bankruptcy, but could be longer to deal with any house equity. The IVA Protocol 14 was launched which gives further guidance on how to deal with equity in the home during an IVA. Most people usually keep their home in an IVA. The IVA is reviewed annually to see if contributions can be increased. Lenders will also request a share of any net overtime above what is stated in your IVA proposal.
5. Do I keep my car/motorbike in a bankruptcy or IVA?
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. However there are some car manufactures that will repossess the vehicle back if the borrower enters into bankruptcy or an IVA.
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.
6. What do I need to pay in fees for my bankruptcy or IVA?
Bankruptcy - From the 21 July 2016, the cost of going bankrupt in England and Wales will increase by £25 to £680, this is made up of the:
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.
7. Will my name and address be advertised in the local paper if I go bankrupt or propose an IVA?
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 maintained by The Insolvency Service that bankrupts and those in an IVA go on until discharge and in the case of IVAs, for the duration, usually, five years or until the certificate of completion has been issued.
8. 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 Free Debt Advice Agencies
9. Do I have to tell my employer that I have gone bankrupt or entered into an IVA?
A lot depends on your employment and terms of contract. For example if you work in the financial services then there may well be clause in your terms of employment contract that say that any form of insolvency will lead to termination of your employment.
Bankruptcy or an IVA is widely accepted in most professions, for example police officers, prison staff school teachers and army personal can go bankrupt or propose an IVA but it will be best to inform your employer before doing so. The best way is to speak with your union, federation if a police officer, or human resources department and enquire as to where you stand, this initially can be done anonymously but if insolvency is your chose debt option then obviously you will need to formally inform your employer.
Once bankrupt you will receive a nil tax code for the first 12 months, this will mean you will have additional pay in your pocket for that period. Before you get too excited just be aware that you will be required to pay this additional sum to the OR’s office. After the 12 months you will revert back to your prior tax code, provided there has been no change in your employment or personal circumstance.
10. Will a bankruptcy or Individual Voluntary Arrangement affect my credit rating?
Both the bankruptcy and the IVA will be recorded on your credit file for a period of six years from the date of commencement. You have to balance this against the debt you are able to write off during the bankruptcy and IVA. We have more information on rebuilding your credit rating after bankruptcy or an IVA How to improve your credit score.
Need more Individual Voluntary Arrangement (IVA) information or have a question then see the IVA links below or visit our IVA / Debt Help forum.
Take me to - What is an Individual Voluntary Arrangement, IVA?
Take me to - IVA Pros and Cons
Take me to - IVA Information / Advice
Take me to - IVA Fees