Debt Management Plan or Bankruptcy?
Debt Management Plan or Bankruptcy?
There are many ways to deal with problem debt. The best debt solution for you depends on a whole host of factors, from your total unsecured debt to how much money you could afford to commit to a monthly payment.
In this guide we’ll compare two debt solutions, Debt Management Plans and bankruptcy, and explore what they are, how they work, and which repayment plan might be best suited to your financial situation.
What is a Debt Management Plan (DMP)?
A debt management plan (DMP) is an informal debt solution that lets you repay your debt through a series of monthly payments that you agree with your creditors.
The payments and length of the arrangement are determined by your affordability, so Debt Management Plans are a flexible way to settle your debts at a rate you’re comfortable with.
What’s the difference between a Debt Management Plan and bankruptcy?
Level of unsecured debts
There is no limit on the total debt you can take into a Debt Management Plan (DMP). You will pay off your debt in full so, in theory, you can use a DMP to pay off any level of debt. In practice, though, paying off tens of thousands of pounds of debt via a DMP will make the arrangement last longer than you would like.
For bankruptcy to be a viable solution to your problem debt you will need to owe at least £5,000 in unpaid debts to creditors, while there is no upper limit on the amount of debt you can include in the bankruptcy order.
If you enter into a DMP, you will make one monthly payment for the duration of the arrangement. The size of the payment depends on how much you can afford, which is usually calculated by working out your disposable income once you have deducted essential expenses like living costs.
Most people who enter bankruptcy don’t have to make regular payments other than a one-off set up fee, although a small number do.
If you apply for bankruptcy and still have a reasonable amount of spare income, you may be asked to put some of it towards an Income Payment Agreement (IPA). This will last for a period of three years, even though you will be discharged from the bankruptcy process after one year.
Debt write off
One of the disadvantages of a Debt Management Plan is that there is no debt write off. You will be expected to pay creditors in full and the arrangement won’t end until you clear all your debts through regular monthly debt repayments.
Bankruptcy, on the other hand, does involve a debt write off. As long as you stick to the terms of the arrangement, you will be discharged from bankruptcy after one year and all of the debts included in the bankruptcy will be wiped, although the damage to your credit record will last longer.
Impact on credit file
Whether you choose a DMP or bankruptcy, both will be listed on the public insolvency register, and will also be included on your credit report for six years.
This will have a negative impact on your credit score (the credit rating given to you by credit reference agencies) and may make it temporarily more difficult for you to access new credit agreements and open certain bank accounts.
Which debt solution will allow me to keep my home?
Debt Management Plan
A DMP will help you with your unsecured debts, so secured debts like mortgages or rent payments won’t factor into the arrangement. As long as you keep up with payments to your mortgage or rented accommodation, you will be able to pay off your debt and protect your home at the same time.
Unfortunately there’s a reasonable chance that you will lose your home if you declare bankruptcy. If you are the owner and you have significant equity in the property, the official receiver may decide to sell it and put the money raised towards the arrangement.
Can I keep my job with a Debt Management Plan?
If you owe money to creditors and decide a DMP is the best way to pay off your debts, you shouldn’t have any trouble as an employee. While the arrangement will be listed on a public register overseen by the insolvency service, your employers are unlikely to come across that information.
It’s similar in the case of a bankruptcy. Details of your arrangement will be publicly available for people who have a reason to look (i.e. future lenders), however if you’re a regular employee of a company, it’s unlikely going bankrupt will have any direct impact on your employment.
If you’re the director of a company your employment situation may get more complicated if you enter a debt solution, however you should be able to keep your directorship if you enter a Debt Management Plan as long as the debts you’re dealing with are personal debts unrelated to the business.
Bankruptcy is different. You cannot be a company director while your bankruptcy remains active, and you also can’t manage or form a limited company without the express permission of the bankruptcy court.
Would I be better off with an Individual Voluntary Arrangement (IVA)?
What is an Individual Voluntary Arrangement?
An Individual Voluntary Arrangement (IVA) is a legally binding debt solution that allows people to consolidate their debts into one monthly payment to their creditors. As long as you maintain your monthly payments for the duration of the arrangement (usually five or six years) your creditors will forgive any debts that remain beyond your payment term.
Unlike a DMP, which can be set up by you or a third party, an IVA can only be arranged by a licensed Insolvency Practitioner. Because it’s a legally binding agreement, you will receive protection from your creditors, who can only contact you via your IP and won’t be able to chase you for payments.
Is an IVA better than a DMP?
Whether you would be better suited to an IVA or a DMP depends on your circumstances. People who enter an IVA typically have more debt overall, and have some form of regular income they can contribute to their debts.
People who enter a DMP usually have less disposable income (and may have been rejected for an IVA based on this) but feel confident they would be able to pay off most debts to creditors if given enough time. A DMP allows them to pay what they can afford at a rate that suits them.
Who can help me make an informed decision on the best debt solution for me?
If you’re struggling with debt but not sure which solution is best for your situation, there are various organisations out there with the knowledge and experience you need to help you come to the right decision.
Debt management company
Debt management companies are private organisations who specialise in setting up and managing debt solutions like DMPs and bankruptcy.
While a licensed debt management company may charge a fee for acting as your DMP provider, or helping to facilitate your bankruptcy, their debt specialists have experience in dealing with creditors and even negotiating reduced payments, which could prove useful to you.
A debt charity is a non-profit organisation that is set up to help people with money problems deal with their priority debts. Examples of debt charities in the UK include Stepchange debt charity, Citizens Advice, and the Money Advice Service (now known as money helper).
Debt charities can also help you set up and manage a debt solution like a DMP or bankruptcy. While they don’t tend to have the same level of resources as some of the bigger debt management companies, they may be able to offer you access to a debt solution free of charge.
Can I use a Debt Management Plan to avoid bankruptcy?
If you’re looking into bankruptcy as a way of dealing with your money problems, it’s important to say upfront that bankruptcy should only be used as a last resort
Bankruptcy has serious implications, for your credit rating, your home, and potentially even your job. If you have serious debts that you have no way of repaying, bankruptcy may be a worthwhile option for you, but you should make sure you seek debt advice before making a decision.
Where can I get debt advice and more information on debt repayment plans?
Nobody should have to deal with serious debt problems alone. No matter how bad things are right now, there are always ways to improve your financial circumstances.
Whether you’re interested in a Debt Management Plan, are considering bankruptcy, or just want to talk to someone about improving your current situation, Creditfix can help.
We’re one of the UK’s biggest debt management companies, and help thousands of people each year to deal with their debt. For free initial debt advice and to explore the options available to you, call Creditfix today on 0800 0431 431.