If you have started an individual voluntary arrangement (IVA) but are unable to maintain the agreed payments, bankruptcy could be an option to resolve your debt problem once and for all.

An individual voluntary arrangement (IVA) is a legally binding agreement with your creditors allowing you to settle unsecured debt over a fixed period of five years.

Once agreed, you pay as much as you can to your creditors and at the end of the arrangement, any outstanding debt is written off.

Thousands of people use IVAs every month to resolve their debt problems. The majority are able to maintain their agreed payments without any issue. However, if you are in an IVA and your financial circumstances change, paying the monthly instalments may become a problem.

A change in circumstances

If you find yourself in a position where you cannot afford to make your agreed IVA payments, the first thing you should do is speak to your insolvency practitioner (IP). This is the person who is responsible for managing the agreement.

Your income may have fallen, but if you can still continue to make smaller payments, your IP can ask the creditors to accept a variation to your IVA.

A variation would allow your monthly payments to reduce. However, to compensate for this, your creditors could ask you to extend the length of time your IVA lasts.

If you are unable or unwilling to make any further payments into your IVA, you could stop paying altogether. If you do this, then your IP will normally have to fail the arrangement.

At this point your creditors are once again free to take action against you to collect their outstanding debt.

The bankruptcy option

One way of resolving your debt problem if you can no longer pay your IVA is to declare bankruptcy. You simply have to wait for your insolvency practitioner to formally fail your arrangement and then you can submit a bankruptcy application to the court.

You should explain on your bankruptcy application form that you have made your best attempt at repaying your creditors by using an IVA but unfortunately have been unable to sustain the required payments.

Once bankrupt, all of your outstanding debts will be taken away from you and you will only be required to make payments towards your debt if you can afford to do so. Even then such payments will last for a maximum of three years.

If you petition for your own bankruptcy, you will need to pay a fee of £600 to the court. One way of paying this fee is to save the money you would otherwise have paid into your IVA.

Are you a home owner?

If you are a home owner, failing your IVA should be an absolute last resort particularly if you have equity in your property.

After your IVA has failed, the insolvency practitioner has a duty to realise any equity you own in your property for the benefit of your creditors by making you bankrupt.

As a result your home could be sold unless a family member or friend is able to pay to the court a sum equivalent to the equity which would otherwise be released.

If you have a debt problem, you should familiarise yourself about all of the options available to help. You should only start an IVA if you are confident that you can maintain the monthly payments.

After you have started an IVA, you could still decide to stop paying and declare bankruptcy. However, if you are a home owner, this should be an absolutely last resort as you will be at risk of losing your home.