IVA’s and bankruptcy are not easy debt solutions

Big decision

A record number of people in the UK are getting so deep into debt that their only option is to declare themselves insolvent. Insolvencies rose by 59 percent in 2006 and are set to increase further this year.

Whilst becoming bankrupt or arranging an Individual Voluntary Arrangement (IVA) may at first seem to be an easy way of escaping from debt problems, there are severe implications which should be considered, as this article explains.

Protecting your credit history

Your ability to obtain credit of any sort, such as a mortgage, credit cards or a car loan, depends on the risk that you present to the lenders. As lenders use your credit history as a key part of their decisions about lending to you, it is important that you maintain as good a credit report as possible.

Declaring yourself insolvent, either through bankruptcy or via an IVA, means that this remains on your credit report for up to 15 years. Lenders will see this and assume that you present a risky profile to them. They will either not lend to you, or only offer credit at high interest rates.

Your future ability to borrow depends on your credit history so you should only declare yourself insolvent as a last resort to be taken if there is absolutely no alternative.

Is bankruptcy a good option?

Bankruptcy is ordered by a court and means that you are legally freed from your debts, although you will have to sell most of your possessions, including your house and car, to help pay off as many debts as possible.

Although there is a better acceptance of bankruptcy, there is still a social stigma associated with it and you may be prevented from taking certain jobs as a result.

Some debts such as student loans and some hire purchase agreements are not covered by bankruptcy so these debts will need to be cleared although you have been declared bankrupt.

The biggest problem to bankruptcy is that your credit history will be stained for many years and you will not only have difficulty in obtaining credit in the future, landlords and employers may decide to select someone else after seeing your credit report.

Being declared bankrupt has long lasting consequences which can affect your life for many years.

Are IVA's a better option?

An IVA is arranged by an Insolvency Practitioner who will negotiate with your creditors to allow you to pay off as much of your debt as possible, within a set time frame, which is normally five years. Any debt remaining after that time is then written off by the creditors.

Being relatively new, IVA's do not carry the social stigma of bankruptcy and do not entail handing over your possessions to the control of an official receiver if your are declared bankrupt.

Click here to enquire about debt management and IVA solutions

As you retain your house and other possessions, the impact of an IVA is often less than bankruptcy, though it is highly likely that you will loose any cash based assets such as shares, premium bonds, endowment policies and some equity in your house, as part of the settlement negotiated with your creditors.

It can be difficult to be accepted into an IVA as stringent criteria about income and equity have to be met. Reasonably high incomes are often required to pay the monthly debt repayments and if the equity in your house is greater than your debts, you would be expected to arrange a remortgage, rather than an IVA, to release this equity to settle the outstanding debts.

An IVA is still listed on your credit history and therefore presents problems when borrowing in the future. Also you are still at risk of bankruptcy is you fail to meet debt repayments.

Try and avoid insolvency

If you have severe debt problems, then either bankruptcy or taking out an IVA, may be your only option, but as we've seen, there are many long term implications with either approach. Insolvency is not a simple solution to major debt problems.

As debt problems grow, you should do everything possible to avoid insolvency. Telling your creditors, particularly gas, water and electricity companies, that you are experiencing payment problems may well help the situation as they could defer or reduce payments for a time. After all if you go bankrupt, they will lose all the money that you owe them.

Keeping an eye on your credit report to ensure that it accurately reflects your circumstances is always a good idea and you can get a free credit report here. If your debt problems become too severe then talk to an Insolvency Practitioner as soon as possible as they may help prevent you slipping into bankruptcy.

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