Even today, the prospect of bankruptcy is looked on with dread by many people, even though the concept of debtor’s prison has long since disappeared. IVAs were actually introduced in the late 1980s, but took some time to come into mainstream consciousness. In 1987 there were only 404 of them whereas in 2005 there were 20,293 and in 2006, there were 44,332. So are IVAs really better than bankruptcy? The answer, as is often the case, is, it depends. Here is a quick guide to how IVAs and bankruptcy impact on various aspects of your life.
The family home
Arguably the headline benefit of an IVA is that it allows you to keep the family home, but how much of a benefit this is depends largely on your situation. If, for example, you have children in school and/or elderly parents living with you and your priority is to avoid disruption, then this may be a big plus, but if you don’t and you have little equity in your home anyway, then, realistically, how much have are you really likely to lose by giving it up? If you do have equity in your home then it is entirely possible that you will be obliged to remortgage to release that equity as part of your IVA agreement so again, unless you can avoid this, the only real benefit of staying in the family home would be avoiding the disruption of moving.
Your job (and housing) prospects
These days, some employers (and many landlords) will undertake credit checks and the harsh reality is that having a poor credit record can limit your options when it comes to employment (and housing). The equally harsh reality is that you can struggle on with debt and still have a pristine credit record, but the moment you either become bankrupt or enter into an IVA, your credit rating will be utterly trashed and only time and good behaviour will repair it. Likewise any employer who’s likely to have an issue with you going bankrupt is probably going to have an issue with an IVA.
Your peace of mind
Bankruptcy is like a dose of strong medicine, it may be unpleasant but it’s straightforward and soon over. The bankruptcy process wipes out (almost) all debt (debts to the government and child maintenance may be excepted). Chances are that in a year you’ll be discharged and able to get on with your life. IVAs, however, are often a whole lot more complicated, particularly if you have equity in your house. As previously mentioned, in this case you are very likely to be instructed to remortgage your home to release it. The potential problem is that you may or may not meet the affordability criteria laid out in the Mortgage Market Review. If you are unable to remortgage for the amount your creditors anticipated then you may well have to renegotiate and/or extend your IVA. You also need to be absolutely clear about the fact that if you are unable to meet your IVA agreement over the long term, you may wind up needing to go bankrupt anyway.
IVAs are very far from being a “silver bullet” for debt issues. They are still very serious processes and are much more complex than bankruptcy. Their headline benefit of being able to keep the family home is arguably more of an emotional one than a financial one since home owners will probably lose any equity they currently have, but they will be able to avoid the disruption of moving, which may be a significant advantage when there are school-age children to be considered.