May 2024
Debt Management Plan vs IVA in May 2024
If you live in the United Kingdom and are having trouble managing your finances or struggling with persistent debt from overdrafts, credit cards or payday loans, you may be curious about what the best debt solution might be for your circumstances. A debt management plan or an individual voluntary arrangement (IVAs) are two popular choices of debt solution.
A Debt Management plan shares a number of similarities with an Individual Voluntary Arrangement (IVAs), but there remain critical distinctions between the two debt solutions. This article will go through some of these differences and attempt to assist you in determining whether either of these debt solutions is suitable for your unique situation.
If you still need more help, there are many places online where you can find free advice on debt management.
Topics that you will find covered on this page
You can listen to an audio recording of this page below.
What are DMPs and IVAs?
A debt management plan (DMP) is an informal debt solution in the form of an informal agreement established between you and your creditors to support you to repay your debts. You will make regular payments to the company running your DMP, which will then distribute the money to your creditors.
An Individual Voluntary Arrangement (IVA) is a formal debt solution which constitutes a legally binding agreement between you and your creditors. Once approved, both you and your creditors are legally obligated to stick to it. It is overseen by an insolvency practitioner (IP) licenced by the insolvency practitioners association, who will determine how much you can afford to contribute each month.
These debt repayments will be made to the insolvency practitioner, who will then distribute them to your creditors.
How could an Individual Voluntary Arrangement help me?
There are several ways in which an IVA debt solution could help you to become debt free:
- You might be able to pay less each month than you would with a DMP. This is because your insolvency practitioner will determine how much you can afford to pay based on your income and expenses rather than simply requesting one monthly payment.
- Your creditors will likely agree to freeze interest and charges on your debts, meaning that you will only have to repay the original amount borrowed.
- An IVA can give you protection from legal action by your creditors. This means that they cannot take court action against you or contact you directly to try and recover the debt.
- If you have a mortgage, an IVA could help you to keep your home. This is because your creditors may agree to release some of the equity in your property so that you can repay your debts.
- An IVA can help you to repay your debts over a more extended period of time than a DMP, meaning that you may find it easier to make payments in monthly instalments.
How could a debt management plan help me?
Like an IVA, there are several ways in which a DMP could help you to repay your debts:
- Again, depending on your circumstances, you may be able to pay less each month than you would under an IVA. This is because you will only have to make one monthly payment rather than making separate payments to each of your creditors.
- Although less likely than with an IVA, your creditors may still agree to freeze interest and charges on your debts, meaning that you will not have to worry about any additions to the original amount you borrowed.
- A DMP can give you protection from legal action by your creditors. This means that they cannot take court action against you or contact you directly to try and recover the debt.
- If you have a mortgage, a DMP could help you to keep your home. This is because your creditors may agree to release some of the equity in your property so that you can repay your debts.
- A DMP can help you to repay your debts over a longer period of time than an IVA, meaning that you may find it easier to make the monthly payments. But remember, under a DMP, there is no debt write-off – you commit to repaying your debts in full.
What are the main differences between an Individual Voluntary Arrangement and a Debt Management Plan?
Eligibility
Since an IVA is a formal and legally binding agreement and a DMP is not, the criteria for qualifying for an IVA are generally much more stringent.
To qualify for an IVA, you will need to fit the following criteria:
- Possess unsecured debts that total at least £6,000
- Owe three debts or more to two or more creditors
- Live in either England, Wales or Northern Ireland
- Have the potential ability to afford regular monthly payments.
On the other hand, there are no objective criteria to qualify for a DMP. Anyone with unsecured debts but who could afford reduced payments and has no trouble paying priority bills (such as a mortgage, rent, or council tax) can propose a DMP to their creditors.
However with that being said, even in a DMP, you must be able to pay your monthly instalments. If your creditors are not confident in your ability to pay your bills on time, they will not accept your payment offer for a DMP.
If you don’t meet the eligibility criteria for an IVA but still have debts that you’re having trouble with, a DMP could be a suitable option for you.
Duration
An IVA lasts for a set period of time, usually five years, after which any remaining debt is subject to a debt write-off. A DMP can last for as long as you need it to – there’s no set end date.
However, most creditors are only prepared to suspend interest and charges on your obligations for a limited period of time – usually 12 months. They may then begin charging interest and fees again, making it more challenging to pay off the debt.
A DMP might be a better alternative for you if you’re not confident that you’ll be able to repay your obligations within five years because it provides a longer period of time in which to pay.
A Debt Management plan shares a number of similarities with an Individual Voluntary Arrangement (IVAs), but there remain critical distinctions between the two debt solutions. This article will go through some of these differences and attempt to assist you in determining whether either of these debt solutions is suitable for your unique situation."
Interest
With an IVA, your creditors cannot add any interest or charges to your debts while the agreement is in place. This means that you will only have to repay the original amount borrowed.
In a DMP, your creditors may agree to freeze interest and charges on your debts, but they are not obliged to do so. This means that you could still end up having to pay more than the original amount borrowed if interest and charges are added back onto your debt.
Charges
There are usually fees associated with setting up an IVA, as well as ongoing fees for things like annual reviews and to your insolvency practitioners. These fees can be compounded with your debt, meaning that you’ll have to repay them over the course of your IVA.
By contrast, there are no fees associated with setting up or maintaining a DMP.
Legal Protection
Under individual voluntary arrangements, any unsecured creditors are not allowed to take any legal action against you or contact you directly to try and recover the debt. This means that you have some protection from things like bailiffs and debt collectors or wage garnishment (a court order which requires your employer to deduct money from an employee’s compensation until the employee’s entire debt is paid).
As a DMP is not a legally binding solution, your creditors are not obliged to provide you with any legal protection. This means that, theoretically, at any point, any one of your creditors could decide to stop your DMP and pursue bankruptcy against you.
However, some companies may agree to provide you with protection from legal action as part of your DMP.
Protection of Assets
If you have an IVA, your creditors are not allowed to seize any of your assets, such as your home or car; however, you may be required to release equity from your property if you are a homeowner. This means that you can keep your possessions even if you owe money to creditors (so long as you can pay your mortgage or any secured loans).
In a DMP, your creditors are not obliged to protect your assets. However, if you have a mortgage, some creditors may agree to release some of the equity in your property so that you can repay your debt.
Credit Rating
Both an IVA and a DMP will have a negative effect on your credit rating and potentially make it more difficult for you to obtain credit in the future.
An IVA will remain on your credit file for six years from the date it is set up. This will make it difficult to get credit during this time.
A DMP will also stay on your credit file for six years, but it will not have as significant an impact on your credit status as an IVA. This is because a DMP is not a formal agreement and is not recorded in the public register. Under a DMP, you are also not restricted from taking out further credit.
How do I find out if an IVA or DMP is right for me?
If you’re struggling to repay your debts and are considering an IVA or DMP, you should pursue debt advice. They will be able to assess your individual financial circumstances and advise you on the best course of action.
However, as a general starting point, the following applies.
An IVA might be more suitable if:
- You owe more than £5,000
- You have a regular income
- You can afford to make monthly repayments as set out in the proposed IVA repayment plan
- You’re confident that you’ll be able to repay your debts within five years
- You want a legally binding agreement which ensures protection from your creditors
- You want to keep your possessions
A DMP might be more suitable if:
- You don’t meet the eligibility criteria for an IVA
- You can afford reduced monthly payments
- You’re not confident that you’ll be able to repay your debts within five years
- You’re not concerned about legal protection from creditors
- You don’t mind if interest and charges are added back onto your debt
- You don’t have any assets that you want to protect
- You’re not worried about your credit rating
How do I apply for an IVA or DMP?
If you decide that an IVA or DMP is the best option for you, you can apply for one through a debt advisor. They will be able to help you with the application process and provide you with support throughout your IVA or DMP.
There are a few things to consider when deciding whether an IVA or DMP is right for you. These include the amount of debt you have, your income, your ability to repay your debts, and the fees associated with each option.
It’s essential to speak to seek impartial debt advice before making any decisions, as they will be able to assess your financial circumstances and advise you on the best course of action and the most appropriate debt solutions.
Can you change from a DMP to an IVA?
Yes, you can change from a DMP to an IVA if your circumstances change. For example, if you find that you’re struggling to make your DMP payments, you may be able to switch to an IVA.
You should seek impartial debt advice if you’re thinking about changing from a DMP to an IVA. They will be able to assess your financial situation and advise you on the best course of action.
Can you switch from an IVA to a Debt Management Plan?
Yes, you can also change from an IVA to a DMP if your circumstances change. For example, if you find that you’re struggling with missed payments on your IVA, you may be able to switch to a DMP.
However, as with any big decisions you make regarding debt management, you ought to consult a debt advisor if you’re thinking about changing from an IVA to a DMP. They will know best whether this decision is the right one for your individual circumstances and financial goals.
Where can I find out more about IVAs and Debt Management Plans?
If you’re struggling with unaffordable debt, you will likely require debt advice. An advisor will be able to assess your financial situation and advise you on whether the best course of action for your unsecured debt is to pursue one of these debt solutions or to try other debt solutions, such as getting help from a debt management company or any number of debt charities.
You can also find more information about IVAs and Debt Management Plans and free debt advice on MoneyHelper, an independent service set up to help people manage their money.
Article author
Katy Davies
I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch. I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.
Outside of work, I love the snow and am a keen snowboarder. Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.
Email – [email protected]
Frequently Asked Questions
How do I find out if an IVA or DMP is right for me?
If you’re struggling to repay your debts and are considering an IVA or DMP, you should pursue debt advice. They will be able to assess your individual financial circumstances and advise you on the best course of action.
How do I apply for an IVA or DMP?
If you decide that an IVA or DMP is the best option for you, you can apply for one through a debt advisor. They will be able to help you with the application process and provide you with support throughout your IVA or DMP.
Can you change from a DMP to an IVA?
Yes, you can change from a DMP to an IVA if your circumstances change. For example, if you find that you’re struggling to make your DMP payments, you may be able to switch to an IVA.
Where can I find out more about IVAs and Debt Management Plans?
If you’re struggling with unaffordable debt, you will likely require debt advice. An advisor will be able to assess your financial situation and advise you on whether the best course of action for your unsecured debt is to pursue one of these debt solutions or to try other debt solutions, such as getting help from a debt management company or any number of debt charities.
