IVA vs Bankruptcy — Which Is Better

An IVA typically lasts five to six years, during which monthly payments are made to an insolvency practitioner who distributes funds to creditors. At the end of a successful IVA, remaining debts included in the arrangement are generally written off. Bankruptcy usually lasts twelve months, after which most people are discharged, though a Bankruptcy Restrictions Order may extend certain restrictions. During bankruptcy, assets including property may be sold, and certain professions may be affected. People exploring these options often find it helpful to obtain a full picture of their income, expenditure, and total debts before comparing the two approaches. Free debt advice services may help assess which option might be more suitable for individual circumstances.

Common situations include: having multiple debts that have become unmanageable, being unable to keep up with minimum payments, receiving pressure from creditors and considering a formal solution, wanting to protect a home from being sold, being self-employed and unsure how insolvency might affect the business, or having been offered an IVA but wanting to understand whether bankruptcy might be a more appropriate option.

Both IVAs and bankruptcy are governed by the Insolvency Act 1986. Part VIII (sections 252–263) covers Individual Voluntary Arrangements, including the requirement for proposals to be supervised by an insolvency practitioner and approved by 75% of creditors by value. Part IX (sections 264–371) covers bankruptcy, including the grounds for petition and the effects of a bankruptcy order. The Enterprise Act 2002 amended the Act to reduce the standard bankruptcy discharge period to twelve months. The Insolvency Rules 2016 provide the detailed procedural framework.

People comparing IVAs and bankruptcy often consider factors including: the total level of debt, whether they own property and the level of equity, their current and likely future income, their employment (some professions have restrictions during bankruptcy), whether they want to make a contribution over several years (IVA) or seek a quicker resolution (bankruptcy), and the impact on credit rating. Both options remain on a credit file for six years and may affect future borrowing. Some people also explore other options such as Debt Relief Orders for lower levels of debt.

Common mistakes include: entering an IVA without fully understanding the commitment to five or six years of payments, not disclosing all assets and income during the insolvency process (which may be treated as an offence), assuming bankruptcy means losing everything when certain exempt items are protected, not considering alternatives such as Debt Relief Orders which may be appropriate for debts under £30,000, and using a commercial IVA provider without first seeking free impartial advice.