When you’re in a tricky financial situation there are several options available that might help. Two of the most popular are an individual voluntary arrangement (IVA) and a debt management plan (DMP). Here we take a look at some things to consider when deciding whether to use an IVA or a DMP.
If you own a home selling it quickly is another option, giving you access to funds at short notice. We specialise in buying houses as fast and with as little fuss as possible. We can buy yours in just seven days if necessary, putting the money in your account on the day of completion. Our approach means we can even help landlords that may need to sell property with tenants that already live there.
What are IVAs and DMPs?
An IVA is a form of insolvency, as such it’s a legally binding agreement between you and your creditors. It must be put together by a registered insolvency practitioner who will negotiate with creditors and manage the agreement. As long as you don’t break the terms of your IVA your creditors can’t pursue you for your debt and interest on your debts is frozen.
Unless you make an agreed lump sum payment an IVA usually involves regular monthly payments for an amount you can afford, for five years. These might not match the full value of what you owe and at the end of that period, any outstanding debt is wiped.
A DMP is a way of helping you manage your debt without going into insolvency which can have wider impacts on your life. You will make monthly payments of an amount agreed with your creditors that will eventually pay off your full debt and any interest.
It lasts for as long as is necessary to pay back everything you owe, sometimes up to ten years. It’s not a legally binding agreement so your creditors can still pursue you for the full payments you first signed up to with them. However, if they’ve agreed to your DMP they’re unlikely to do this.
You can set up DMPs through debt management companies, but they will charge a fee whereas certain charities will give you debt management plan help for free, including negotiating with your creditors.
Costs and what’s covered
Both solutions are most commonly used to cover unsecured debt, for example credit cards, overdrafts and payday loans. Lenders you have secured debts with, such as your mortgage, are unlikely to agree to be included since there is an asset they can take value from.
Utility bill arrears can be included in an IVA but not a DMP, although your regular bill payments will be taken into account when working out how much you can afford to pay your creditors each month as part of a DMP.
Because of the fees associated with hiring an insolvency practitioner to put together and manage an IVA, which can start at £2,000, it’s usually used for larger debts of more than £10,000.
As we’ve mentioned debt charities will organise a DMP for free, other companies will charge a fee, possibly around 15%. The plan will involve paying off all your debt but your payments will be less than the amount you agreed when you took out the credit.
Other things to consider
Unlike an IVA, your creditors do not have to freeze interest payments when you go onto a DMP. But many will understand it’s unlikely you’ll be able to afford extra costs and won’t want to add to the financial pressure you’re under. However it’s worth repeating that, because a DMP isn’t legally binding, your creditors can chase you for any payments you owe at any time, including through the courts. In reality they probably won’t do this unless you stop following the plan. If your circumstances change a DMP offers flexibility to either amend the plan or move onto an IVA. Because an IVA is a legal agreement it doesn’t offer the same leeway and is much harder to change. If you stop making IVA payments your creditors will be able to quickly start pursuing you for the money you owe, which could involve forcing you into bankruptcy.
If you go bankrupt you will have to sell your assets including your home. Neither a DMP nor an IVA will make you sell your home, but under an IVA your creditors may ask you to use some of the equity in it to pay them. If that’s not possible you may have to extend the length of your repayment term.
When it comes to your credit rating an IVA will stay on your file for six years, you will also be included on the Insolvency Register, which can impact certain jobs, such as those in accountancy, and prevent you from becoming a company director. You will also have to get your creditors’ permission to borrow more than £500.
If you have a DMP, your creditors can put a default notice on your credit file if they wish, which will also stay there for six years. However, if you’re making regular payments it will reduce the impact it has on your credit rating.
Deciding what’s right for you
Making decisions about your finances can be difficult, especially in times of stress. That’s why it’s important to discuss your needs with an independent debt advisor who can explain your options and how they might improve your specific situation.
We’d also be happy to chat with you about whether selling your home is a good option. We’ve been buying homes quickly for more than three decades and are experienced at dealing sensitively with people selling theirs in challenging times. If you’d like to talk, get in touch.