An Individual Voluntary Arrangement (IVA) is one of the most popular debt solutions in the UK, offering people with money problems a form of insolvency that helps them avoid bankruptcy. On the other hand, the most popular informal solution is the Debt Management Plan (DMP).
Both have advantages and disadvantages, but which is best for you depends on your debt level and the types of debt you carry. Below, we give you the information you need to make an informed decision when choosing between these two debt solutions.
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What do IVA and DMP mean?
IVA stands for Individual Voluntary Arrangement, and DMP for Debt Management Plan. Both are debt management solutions for people struggling with unmanageable debts, and involve repaying money owed by way of a single monthly payment.
What is an IVA?
An IVA is legally binding agreement to settle your debts. Once your creditors have accepted it, they will not be able to take legal action against you – either by petitioning to make you bankrupt, or taking other court action. They can only contact you via your Insolvency Practitioner (IP) – a debt professional authorised by the Insolvency Practitioners Association to deal with your case.
IVAs allow you to avoid insolvency proceedings and bankruptcy by consolidating your priority debts into one affordable monthly payment. IVAs also allow you to write off some of your debt, unlike DMPs.
What is a Debt Management Plan?
A DMP is a debt management solution similar to an IVA, with the main difference being that DMPs are not legally binding. This means that your creditors can still take action against you should you default on your revised payment plan. They are also still free to contact you.
As well as not being legally binding, DMPs don’t allow you to write off debts. At the end of an IVA agreement, any outstanding dent is written off. When you reach the end of a DMP, on the other hand, you will have paid off your debts in full.
How do I know if I'm eligible for an IVA or DMP?
The eligibility criteria for entering into an IVA in the UK are stricter than for a DMP. You must:
- Have at least £6,000 of unsecured debt
- Owe money to two or more creditors
- Live in England or Wales (Scottish residents could consider a Trust Deed)
- Be able to afford a monthly payment of at least £80
For a DMP, there’s no strict rules or information you need to produce to qualify. Anyone struggling with debt or facing bankruptcy can set one up, as long as you can afford reduced monthly payments and have no trouble paying priority bills (mortgage, rent, or council tax).
How long do IVAs and DMPs last?
How long it will take to clear your debts is another important factor in deciding which solution to choose.
IVAs: Five years
IVAs usually last for five years, at the end of which you will be debt free. IVAs can last an additional year if you do not own property, and must make an extra year of payments instead of releasing equity. Your IVA may also be extended by a few months if you take a break from making payments. These missed payments will usually be added to the end of the plan.
DMPs: No set length
DMPs have no set length, but usually last no more than ten years. They tend to last longer than IVAs, however, because they require you to repay what you owe in its entirety, without unaffordable debt being written off. This means that, for relatively high levels of debt, DMPs tend to be more expensive than IVAs – especially if you choose to go through a private DMP provider.
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How much do IVAs and DMPs cost?
Set up fees
Setting up an IVA is the Insolvency Practitioner’s responsibility. The IP will negotiate with creditors on your behalf, and establish and administer your repayment plan. They do charge for their services, however fees are included in your monthly payments, which are based on what you can afford.
Establishing a DMP is slightly different – there a few options. You could negotiate with your creditors and set up the DMP yourself, or get help from a debt management company or debt charity. A debt charity will negotiate with creditors and establish a DMP free of charge, but you might choose to use a third party firm. Fees for a third party will vary, and are usually around 15% of your monthly payments.
Interest and charges on your debt
One benefit of an IVA is that as soon as it is established, all interest and charges on your debts are frozen. You simply pay your monthly instalments for a fixed number of months, and at the end of the plan, any remaining debt is written off.
With a DMP, your creditors might also agree to freeze interest and fees, but this is at their discretion. Additionally, you will pay off the entire balance of your debt with a DMP, meaning they can take much longer than an IVA in some cases.
Do IVAs and DMPs protect you from creditors?
When it comes to debt, people’s main source of anxiety tends to be what action creditors could take – whether harassing letters and phone calls, or visits from bailiffs and debt collectors.
IVAs: Creditors cannot legally contact you
Once the majority of your creditors have agreed to the proposed IVA repayment plan, they are all legally bound by its terms. This means your creditors will no longer be able to contact you at all. Instead, they must relay any communication through the Insolvency Practitioner (IP) dealing with your case. An IVA also legally requires your creditors to freeze all interest and fees on your debts.
DMPs: Expect less contact from creditors
Once you have a DMP established, you can expect less contact from your creditors, but this can take time, and they are not under any obligation to cease communications with you. Unlike IVAs, however, DMPs do not give you legal protection, so creditors may take legal action against you.
Will IVAs and DMPs impact homeownership?
Another important thing to bear in mind when choosing a debt solution is how this could affect your assets – especially if you are a homeowner.
IVAs: Potential to keep your home
Once an IVA has been established, your assets are legally protected. However, if you are a homeowner, and have a significant amount of equity in the property, you will likely have to release some or all of it in the final year of the IVA.
DMPs: No legal protection for your home
DMPs do not offer any protection for your assets. Your creditors could decide to end your DMP, and send bailiffs to your home or petition to make you bankrupt, which could involve the loss of your assets. This is unlikely if you keep up with your DMP payments, though, since creditors are likely to regain more of what they are owed through regular payments.
Do IVAs or Debt Management Plans affect your credit rating?
All debt solutions affect your credit score. IVAs and DMPs are no different. An IVA will stay on your credit file for six years, but since it allows you to write off unaffordable debt, in the long-term it will be easier to rebuild your credit than it would be if you had not taken action to deal with your debts.
During a DMP, you will not be legally prevented from taking on further credit, but charity providers, such as PayPlan and StepChange, will stipulate that you do not as part of their agreement to help you with your debt. Like an IVA, a DMP will have a negative impact on your credit score, and it will take time to rebuild your score once the plan has finished.
Can you change from an IVA to a Debt Management Plan?
It is possible to switch from an IVA to a Debt Management Plan, but because an IVA is a legal contract, you’d need to convince your IP and creditors that you had good reason to. The main reason would be if you found yourself with more income, and wanted to pay more towards your unsecured debts.
A DMP offers you a bit more lee-way to pay off your debts more quickly, but as an informal debt solution, you wouldn’t enjoy protection from any individual or company you’re indebted to, and these lenders could end your DMP without any consideration for your situation.
You should consider seeking debt advice – either with a debt charity or debt management company – before taking this kind of decision.
Is an IVA or Debt Management Plan better?
Which debt solution you choose is up to you. However, an IVA may be better if…
- You feel unable to repay your debt in full
- Creditor harassment is impacting your life
- You have a high level of debt – £6,000 or more
- You have access to enough disposable income to cover debt repayment services
On the other hand, a DMP may be best if…
- Given enough time, you feel able to repay everything you owe
- You’re not worried about creditors having your contact information and getting in touch
- You have a steady disposable income which could be put towards debt repayments
- You have debts totaling less than £6,000
Where can I find out more about IVAs and Debt Management Plans?
Free debt guidance can sometimes be the difference between repayment and bankruptcy. If you’re struggling with money and looking for ways to deal with debt, you’re right to seek debt advice.
IVA Plan can help. We have put together a team of advisers who specialise in IVAs, whether you’re ready to look at a formal debt solution, or just want more information or free debt advice.
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