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With so many debt solutions available to UK residents, it can be difficult to know which is the right one for you. Before making any financial decisions, it’s vital that debtors understand exactly what they’re signing up for and what the implications will be both for their finances and their lives more generally.
Individual Voluntary Arrangements (IVAs)are one of the UK’s most popular formal debt solutions, with an increasing number of debtors turning to them for help each year. Equally, Debt Management Plans (DMPs) can provide an informal alternative to IVAs and are also well used by people who are struggling to deal with their financial situation.
Read on to learn more about how both IVAs and DMPs work, along with the key differences that set them apart.
IVA vs DMP – What are the differences?
IVAs and DMPs are just two examples of the debt solutions available to people in the UK who are struggling to cope with unmanageable levels of debt. Both solutions involved making reduced payments that are more affordable for the debtor, as part of a repayment plan agreed with their creditors.
One of the major differences between IVA and DMP solutions is that, whilst IVA is legally-binding, DMP is not. If your creditors agree to the terms of an IVA, they are bound by them and will be unable to take legal action against you to recover the debt. They will also be barred from contacting you and all communications must be made via the Insolvency Practitioner (IP) that is dealing with the administration of your IVA. Throughout the IVA period, a debtor will be required to make regular payments towards their debts, and once it has reached its end (usually after five to six years), any remaining debt will be written off.
DMPs, by contrast, are not legally binding and do not prevent creditors from taking legal action against a debtor – who they remain free to contact and chase for repayment.
Another difference is that, unlike IVAs, DMPs do not provide for an automatic debt write off process and debtors will still be required to pay everything that they owe – albeit over a longer period of time. Even without these protections, however, a DMP can still meet the needs of some debtors in certain circumstances.
DMP vs IVA – What are the eligibility criteria?
As an informal debt solution, there are no set rules for who can use a DMP. Anyone who is struggling to keep up with their existing liabilities, but who could afford to make reduced payments towards them whilst continuing to pay for priority debts (such as mortgage or rent payments, utility bills, council and income tax and any court fines) could find that a DMP is suitable for their needs. There is no minimum debt figure required for a DMP, and it does not matter how your debts are structured or how many creditors you have.
In stark contrast to this, the eligibility criteria for entering into an IVA are much stricter – although as a formal and court-endorsed debt solution this is to be expected. To qualify for an IVA, you must:
- owe at least £6,000 in unsecured debt;
- have two or more creditors;
- live in England, Wales or Northern Ireland; and
- be able to afford regular (usually monthly) payments to your creditors.
How long do IVAs last compared to DMPs?
Another example of the differences between IVA and DMP is the period of time for which these debt solutions last.
Unless they are able to generate a lump sum (from the sale of an asset or from receiving a windfall payment for, for example), debtors entering into an IVA can typically expect to make regular payments towards their debts for a period of five years. An additional sixth year may also be required if a debtor who owns equity in a property is unable to remortgage their home to raise funds for creditors, whilst a debtor who takes a break from making payments during their arrangement can expect it to be extended to reflect what they have missed.
In comparison, DMPs have no set length – although they do not usually last for longer than ten years. As DMPs do not automatically allow for debt to be written off, anyone entering such an agreement will usually be required to pay the full amount that they owe. This goes some way to explaining why DMPs can last longer than IVAs, as debtors must generally pay their debts in full – which can take some time to do when making reduced payments.
What is the difference in cost?
An IVA cannot be set up without the assistance of an Insolvency Practitioner (IP), who will deal with both the establishment and administration of your arrangement. This includes dealing with your creditors on an ongoing basis, along with the practical matter of receiving and distributing your regular payments. Insolvency Practitioners do charge fees for these activities, however, these fees are drawn from the regular payments made by the debtor and should not be viewed as an additional cost in their own right.
The costs of a DMP vary depending on how you choose to set one up. Some debtors are quite content to approach their creditors themselves in order to strike up an agreement, but this approach is not suitable for everyone. Those who do not feel able to deal with their creditors directly may wish to get help from a private debt advisory company or a debt charity. Although the latter of these options will typically set up a DMP for free, the fees set by private companies vary.
One major additional factor to note when considering the costs of these debt solutions is that, whereas a debtor with an IVA can expect any debts that remain at the end of their arrangement to be written off, there is no such mechanism with a DMP. For the most part, debtors who enter into a DMP will be expected to pay all that they owe and as a result the total cost of this solution can exceed that of the more formal IVA alternative.
How will I be protected?
Although IVAs and DMPs are often touted as similar debt solutions in terms of their structure and what they can offer, there are several key differences in the way that they work and to what extent they can offer you protection.
Protection from Creditors
As mentioned previously, IVAs can offer a considerable amount of protection from creditors, who are unable to take legal or other enforcement action against a debtor once they have agreed to the terms of the arrangement. On top of this, once your IVA is in place debtors will no longer be able to contact you and must instead deal with the Insolvency Practitioner (IP) handling your case. On a practical level this can provide a source of relief to debtors who will no longer have to deal with some of the most stressful aspects of debt including being chased by creditors or facing legal action.
As an informal debt solution, a DMP does not prevent your creditors from contacting you or from commencing enforcement efforts (including legal action). In many cases, a debtor entering into a DMP can expect less contact from their creditors than if they had taken no action to solve their debt issues – although a level of contact will remain necessary to continue dealing with the administration of the outstanding debt.
Interest and Fees
A key advantage of entering into an IVA is that once it has been established your creditors will stop adding charges and interest to your debt – effectively freezing what you owe. This can help to prevent your debts from growing to an even more unmanageable level. Once an IVA reaches its endpoint, any qualifying debt that remains will be written off.
In comparison, creditors are not required to freeze interest or charges in the case of a DMP – however they may do so at their discretion. Unlike IVAs, a DMP does not have a mechanism for automatically writing off remaining debt and you will usually be expected to repay the full amount that you owe.
Homeownership
If you are struggling with debt, the fate of your home is likely to be amongst your top concerns. When comparing IVAs and DMPs, this too can be a useful factor in deciding which option may be best for you.
Once an IVA has been set up and your creditors have agreed to its terms, your assets will be legally protected and you will not usually be required to sell your property. Despite this, if there is significant equity (the proportion of your property that you own, once the costs of any mortgage costs or other form of secured borrowing have been taken into account) in your home it is likely that you will be expected to remortgage the property to release funds for your creditors.
This usually happens towards the end of an IVA, and those who are unable to remortgage their home are typically expected to make payments towards their debts for an extra year to reflect this. This may be necessary as, in practice, entering into an IVA is likely to negatively impact your credit rating and for some debtors this could make it much more difficult to access further lending in the form of a remortgage.
Contrastingly, DMPs do not offer any formal protection for your assets – including your home. Creditors are still able to take legal action against you, which could include sending bailiffs to your address or petitioning the court to make you bankrupt. This is unlikely to happen, however, provided that you keep up with all agreed repayments under the DMP.
Will a DMP or IVA affect my credit rating?
When considering possible debts solutions, many people will also be looking to the future and thinking about how they can manage their finances going forward. A major feature of your financial status is your credit rating (or credit score), which is determined based on you’re the history contained within your credit file.
An IVA will remain on your credit file for six years from the date that it begins, which may make it difficult to access new credit for this period. During an IVA, your access to further credit will also be restricted and will require the permission of your Insolvency Practitioner (IP). Although these restrictions may sound harsh, taking this approach may help you to rebuild your credit rating in the future as your finances ought to be in a more manageable state than if you had simply ignored mounting debts.
As an informal debt solution, a DMP does not impose any restrictions on your access to further credit, but details of your plan will appear on your credit record and may have a negative impact on your credit score and ability to access further borrowing.
IVA or DMP? Which is better?
Unfortunately, there is no simple answer to which debt solution is best and whether an IVA or a DMP could be the most appropriate option for you will depend on your circumstances. Both DMPs and IVAs come with their own advantages and disadvantages attached, but at a glance they can be summarised as set out below.
An IVA may be an appropriate debt solution for you if:
- you have debts of £6,000 or more, spread across two or more creditors;
- you are unable to repay what you owe in full within a reasonable timeframe;
- you have enough regular income to be able to keep up with your priority debts, pay for the essential costs of living AND to contribute towards your outstanding debts; and
- you are struggling to cope with your debts and want to be protected against your creditors.
Alternatively, a DMP may suit your needs if:
- you can realistically pay off all of your debt, just in smaller instalments and over a longer period of time than originally agreed;
- you have a regular stream of income that can be put towards your debt payments, whilst continuing to pay for priority debts and essential living costs; and
- you are comfortable dealing with your creditors and do not need formal protection from them.