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How to deal with debt Bankruptcy and IVAs explained

Dealing with debt

Bankruptcy or an IVA could be the best debt solution for you, but make sure you take free, independent advice.

Individual voluntary arrangements (IVA)

An individual voluntary arrangement (IVA) is a formal arrangement through the county court, and can be a way to avoid the more onerous downsides of bankruptcy. The Scottish equivalent, a protected trust deed, works in a similar way. They are aimed at those owing more than £15,000 and who have a regular income. 

IVAs work as follows: the debtor engages an insolvency practitioner (IP) who then draws up a repayment schedule (details of IPs are available from the Insolvency Service - see free debt advice contacts). The debtor then makes a monthly payment to the IP, who divides this amongst the creditors.

For an IVA to be agreed, debtors need the agreement of 75% of their creditors by value, giving banks significant influence. If agreed, the IVA lasts for between three and five years, after which any outstanding balances on debts are written off.

  • Pros: Unlike with bankruptcy, debtors won't usually lose their possessions, although you may be asked to release some of the equity in your property towards the end of the IVA term.
  • Cons: Repayment terms are longer than under bankruptcy and IPs' fees can be expensive. The agreement also stays on your credit file for six years.

Bankruptcy

Bankruptcy is a court order that you can apply for if you're unable to pay your debts. It should be your last resort. Alternatively, any creditor to whom you owe over £750 can apply to have you declared bankrupt.

Under a bankruptcy order, the Official Receiver takes control of your money and property and deals with your creditors on your behalf. Bankruptcy usually lasts for one year. The Scottish equivalent of bankruptcy - sequestration - lasts for three years.

Regardless of where you live, debts such as court fines and student loans will not be written off.

  • Pros: Bankruptcy can be the best option, especially if you owe a lot, have few assets and no way of repaying the debts. Once discharged from bankruptcy, you will no longer have to pay any outstanding debts detailed in the proceedings. 
  • Cons: Bankruptcy remains on your credit reference file for six years and may prevent you from getting credit during that time. The Official Receiver also has the power to sell most of your assets, and you may have to make monthly payments from your income for three years from the date of the agreement. Your bankruptcy may be listed in newspapers.