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26/02/2018

IVA or DMP?

26/02/2018

IVA or DMP?

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Choosing a debt solution is not to be taken lightly. There are so many ways to deal with your finances that figuring out which way is right for you can pose a huge challenge.

It is important to know as much as possible about your options before reaching a final decision. You’ll need to decide whether you’re going to choose a formal solution, or an informal one. Since formal debt solutions are legally binding to both you and your creditors, they are different to informal solutions in a few key ways.

One of the most popular formal debt solution is the Individual Voluntary Arrangement, or IVA. In fact, IVA use has been on the rise in past years, as more and more people who are struggling with debt opt for this solution rather than go through bankruptcy. On the other hand, the most popular informal solution is the Debt Management Plan, or DMP.

Both have advantages and disadvantages, but which is best for you will ultimately depend on your individual circumstances. Below we explore a few of the key issues you should consider when choosing between these two debt solutions.

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What do IVA and DMP stand for?

IVA stands for Individual Voluntary Arrangement, and DMP stands for Debt Management Plan. Both are solutions for people who are struggling with unmanageable debt, and both involve making reduced monthly payments as part of an altered repayment plan agreed between you and your creditors.

The main difference between the two solutions, as mentioned above, is that one is legally-binding, and the other is not. In practice, this means that, with an IVA, once your creditors have agreed to its terms, they are entirely bound by them. They will not be able to take legal action against you – either by petitioning to make you bankrupt, or taking other court action. They will also be unable to further communicate with you, but must instead contact the licensed Insolvency Practitioner (IP) who is dealing with your case. This can remove a huge source of stress for people struggling with debt, since hassling letters and phone-calls are some of the most frequently-cited triggers for poor mental health among people with problem debt. IVAs also allow you to write off some of your debt, unlike DMPs.

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. Despite this, there are reasons why a DMP might can still be a better solution in certain circumstances.

Eligibility

The eligibility criteria for entering into an IVA 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, which is a similarly structured solution)
  • Be able to afford monthly payments, usually of at least £80

For a DMP, on the other hand, there are no set rules for who can use one. Anyone who is struggling with their current debt obligations, but could afford reduced monthly payments and has no trouble paying priority bills (such as mortgage, rent, or council tax) is able to propose a DMP to their creditors. If you do not have enough debt to be eligible for an IVA, a DMP could be a good option.

Plan Length

How long it will take to clear your debts is another important factor in deciding which solution to choose.

  • IVA

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.

  • DMP

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.

Cost

To set up an IVA, you must speak to a licensed IP. They negotiate with creditors on your behalf, and establish and administer your repayment plan. This incurs fees. However, these fees are always included in your monthly payments, which are themselves based only on what you can afford. This means that what you pay is not based at all on IP’s fees.

Establishing a DMP is slightly different – there are three options. You could negotiate with your creditors and set up the DMP yourself, which some people do feel comfortable with, or you could get help from a private company or charity. Debt charities will negotiate with creditors on your behalf and establish a DMP free of charge, but you might choose to use a private firm, whose fees will vary. Fees are usually around 15% of your monthly payments.

Interest and Fees on your Debt

One benefit of an IVA is that as soon as it is established, all fees and interest payments 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.

Protection 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

An IVA is a legally binding solution to problem debt, and once the majority of your creditors have agreed to the proposed IVA repayment plan, all of them are bound by its terms. This means they cannot take any legal action against you, such as petitioning to have you declared bankrupt, or sending bailiffs to your home. Once an IVA has come into effect, 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

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, DMPs do not legally prevent your creditors from taking legal action against you, and they are not legally bound by the terms of the DMP. This means that they could, in theory, decide to stop the DMP at any time, or pursue bankruptcy. Your creditors may decide to freeze interest and fees on your debts during a DMP, but they are not legally obliged to do so.

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.

  • IVA

Once an IVA has been established, your assets are legally protected – this is one of the main advantages IVAs have over bankruptcy. 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. Not being a home owner does not prevent you from getting an IVA, but you will be expected to make an extra year of payments or secure a lump sum from a third party in lieu of releasing equity from a property.

  • DMP

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 than by going through the process of seizing assets.

Credit Rating

During the course of an IVA, you will not be able to access further credit without the permission of your IP. However, since you work out a manageable budget with them at the beginning of the IVA, you should be able to manage without further credit.

If an emergency expense presents itself, you can always take a break from paying into your IVA in order to deal with it.

An IVA will stay on your credit file for six years. However, since IVAs allow 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..

Conclusions

Which debt solution you choose is ultimately your decision, but an IVA may be better if:

  • You do not feel able to repay your debt in full in a reasonable amount of time
  • Creditor harassment is having a serious impact on your life
  • You have a relatively high level of debt – £6,000 or more
  • You have a steady stream of disposable income which could be put towards debt repayments

On the other hand, a DMP may be the best choice if:

  • You feel able to repay what you owe in its entirety, given enough time and smaller instalments
  • You are not worried about continued contact with your creditors
  • You have a steady stream of disposable income which could be put towards debt repayments
  • You have debts of under £6,000

For more advice on whether an IVA or DMP could be the right solution for you, contact Creditfix on 0808 2085 198.