Is ‘Free’ Debt Help Always the Best Help?
9th January 2018
Everyone loves free things. Free food always seems to taste better, and who hasn’t been enticed by a ‘Buy One, Get One Free’ offer? Often, getting something for free can feel like an achievement of its own. But, does ‘free’ always automatically equal ‘better’? In the case of Individual Voluntary Arrangements (IVAs), the situation is a little more complicated.
First of all, there is no such thing is a ‘free’ IVA.
All IVAs are set up, and administrated, by Licensed Insolvency Practitioners (IPs). Whether you go to a charity or a professional, ultimately, an Insolvency Practitioner will handle your IVA, and they will require payment to do so.
This, however, is not as daunting as it sounds. This is because payment to your IP is taken from your affordably monthly payment, rather than in an upfront fee. This means it does not affect the amount that you pay into your IVA.
The IVA Process and IP Payment:
- An advisor works with you to understand your situation.
- Your actual income and expenditure is calculated, and is used to determine how much you can afford to pay every month. Whether you can afford £100 a month, or can afford £1,000 a month, only the amount that suits your situation is proposed to your creditors.
- An agreement is put together offering all your creditors a proportional cut of your monthly payment for a period of 5 or 6 years. After this period, your remaining debt would be written off.
- The agreement is proposed to your creditors by an IP.
- If it is accepted, the IP is paid using the money in your monthly payments. This is decided through negotiations between your IP and your Creditors, but, generally, IPs are paid all of the first few payments, and a percentage of payments thereafter.
- For example, you might pay £200 a month into a 60 month IVA. The Insolvency Practitioner is paid using the first 5 payments (a total of £1,000), and is then paid £30 a month thereafter. This leaves your creditors with 55 months of £170 to share between them.
- After all the terms of the agreement are met, the IVA is completed and your remaining debts are written off.
Ultimately, this means that the most important aspect of an IVA to you is how much your monthly payments are, rather than whether you are working with a charity or a professional IVA provider.
As well as this, working with a professional has its benefits.
A professional insolvency company is often well positioned to enter into negotiations with your creditors. As the largest Personal Insolvency company in the UK, and with over 70 years’ experience between our IPs, Creditfix knows the industry like the back of our hands. Our experience means that we know the creditors who are likely to approve, or reject, your IVA proposal, and this has led to us successfully helping over 52,000 people with their debt.
Similarly, professional companies have more incentive to get your IVA approved. We only get paid if negotiations are a success, so we will give you the most honest advice possible about your situation, and fight hard for the IVA’s approval once we have taken it on. This has led to an 80% approval rate of IVAs across the industry, with Creditfix achieving an IVA approval rate of over 90%.
But what about Free Debt Management Plans?
Debt Management Plans (DMPs) are a debt solution in which you can contact your creditors, either directly, or through a third party, in order to renegotiate your monthly payments to be based on your actual income and expenditure, and, thus, more affordable.
This has very similar to a benefits to an IVA, as your payments become smaller and much more manageable. However, as many providers will tell you, if you negotiate yourself or use a charity, it can also be considered truly ‘free’, due to the lack of need for an IP.
The IP, however, provides an indispensable role in making an IVA a formal, legal solution, which binds your creditors. With a DMP, your creditors can change their mind and continue to contact you, which they cannot do under an IVA.
This is not the only difference, however, and the question of whether to use a DMP or an IVA really depends on your needs and situation, rather than the perceived ‘cost’. For example:
- An IVA involves your debt being written off after 5 or 6 years of payment; a DMP does not. A DMP may not even freeze your interest and fees to your creditors, and this means that, while your payments may become more affordable, you could have to pay them for a much longer time before you become debt free. This may result in you spending more on a DMP over the length of the agreement, than you would have through an IVA.
- Despite this, it can be harder to get additional credit once you have taken out an IVA, so if you think you are likely to get into further debt, it is worth exploring other options, such as a DMP.
These are just the key differences between the two solutions, but, crucially, neither makes upfront or additional payment a necessity. In both, you are simply expected to pay lower, monthly payments that are based on your actual income and expenditure, with no additional, hidden costs.
So, what should I do?
The important thing to remember is there are many factors to consider when looking at debt solutions, other than simply whether the solution is officially ‘free’ or not. While IVAs have advantages and disadvantages, fees are not much of a factor. A DMP, under certain circumstances, can be considered truly ‘free’ where an IVA is not, but an IVA should never cost you upfront fees, whether you go to a charity, or to a professional. Ultimately, they should cost about the same per month, while a DMP could cost you more over the length of the agreement.
What matters more is whether you consider your proposed monthly payments to be genuinely affordable, the length of time you will be repaying your debts for, your preference for legality binding your creditors, or informality for taking out further credit, and your provider’s experience negotiating with creditors.