Debt Management Plans vs Individual Voluntary Arrangements

If you are facing debts and looking for a solution, you might be thinking about a Debt Management Plan (DMP) or an Individual Voluntary Arrangement (IVA).

It can feel hard to pick the right one. But don’t worry; you’ve come to the right place. More than 170,000 people visit our website every month to learn about debt solutions.

In this article, we’ll talk about:

•  How an Individual Voluntary Arrangement (IVA) works
•  The steps to follow in a Debt Management Plan (DMP)
•  The big differences between an IVA and a DMP
•  How these plans could affect your job
•  Other choices you might have for managing your debt

Dealing with debt can be scary, and it’s common to feel unsure about seeking help. In fact, Citizens Advice revealed that 60% of adults facing financial difficulties hesitate to seek assistance.¹

Some of our team have been in your shoes. But remember, you’re not alone in this – we’re here to help you understand your options.

How does a DMP Work? 

A DMP is an informal agreement between you and your creditors which states that you will make reduced payments towards your debts to them until your debt is completely written off. 

It works in fairly the same way an IVA does in that you make monthly payments at a reduced rate. The rate is determined by what you can afford. 

Since DMPs require you to pay off all of your debt, they can often last longer than IVAs. 

Furthermore, DMPs are not legally binding.

This means that your creditors can still pursue legal action against you if you happen to default on a monthly payment. 

While it may seem like IVAs are objectively the better debt solution, there are certainly some cases in which a DMP might be the better option for you. 

Advantages

I’ve put together this quick table to help you better understand the advantages of a Debt Management Plan.

DMP Advantages
Consolidate debt payments – into simpler, more manageable, creditor-approved repayments.
Creditors may cease communications and legal action – less contact and worries, less stress!
An informal agreement – offers a more private alternative to insolvency solutions like bankruptcy or an IVA to clear unsecured debts.
Flexibility – for adjustments if circumstances change, such as loss of income or you can pay it off early, or when changing providers.
Free DMP providers – No need to pay a fee, ensuring full payment goes to debt repayment.

How does an IVA Work? 

An IVA is a legally binding and formal agreement between you and your creditors (the people who you money to). 

It states that for an agreed-upon period of time (typically 5 years), you will make reduced monthly payments towards your debt(s) to them. These payments will be based on what you can afford. 

When the agreed-upon period is over, any debt that remains is written off. 

IVAs are debt solutions that are preferred by a majority of Brits as they are extremely flexible and ensure that you’re only paying what you can afford. 

Furthermore, since they are legally binding, your creditors have to abide by its terms. 

Key Differences

The best way to help you determine which debt solution would be suitable for you is to highlight the differences between them. 

Learning how a debt solution can affect you in different aspects of your life can help you make an informed decision about whether it would be right for you or not. 

Eligibility 

Since an IVA is a formal agreement and a DMP isn’t, the criteria for qualifying for an IVA are much more stringent. 

To qualify for an IVA, you need to: 

• Have unsecured debts that total up to at least £6,000
• Owe three or more debts to two or more creditors 
• Live in England, Wales or Northern Ireland 
• Have the ability to afford regular monthly payments.

On the other hand, there are no real criteria to qualify for a DMP. Anyone that has unsecured debt(s) can opt to get a DMP. 

That being said, even in a DMP, you need to be able to afford monthly repayments. Your creditors are not going to accept your payment offer for a DMP if they’re not confident in your ability to make your payments on time. 

If you don’t meet the eligibility criteria for an IVA but still have debts that you’re having trouble with, a DMP could be a suitable option for you.

Duration 

The time it’s going to take to become debt-free is a factor that is at the top of every debtor’s priority list. 

A typical IVA usually lasts five years.

However, if you can’t release equity from your property and can’t come up with a lump-sum payment in your final year, then it may be extended to six years. 

Furthermore, if you happen to miss any of your monthly repayments towards your IVA or take a payment break for a few months, then its duration could be extended as well. 

The repayments that are missed are typically added at the end of your IVA which is why its duration gets extended. 

DMPs have no “typical” duration.

Every DMP is different from the other in terms of duration but most DMPs don’t last more than ten years. 

That being said, they are usually longer than IVAs since they require you to pay off your debt in full. 

If you have a high level of debt and can only afford small monthly repayments, then your DMP is going to last a long time. On the other hand, if you have a relatively smaller amount of debt, then your DMP will be over much more quickly. 

Interest and Charges 

One of the major aspects that keeps people in debt is interest. Many people take out loans at high interest rates and thus, start having trouble paying them back. 

Many people often get trapped in ‘persistent debt’.

Persistent debt refers to when the debt is increasing at a rate that is faster than what is being paid back. In these cases, an interest freeze can be the change that finally has your debt value decreasing!

The great thing about an IVA is the fact that as soon as it is approved, any interest and additional charges on your debt(s) are immediately frozen. 

You only have to pay monthly instalments for a fixed amount of time after which any remaining debt you have is simply written off. 

When it comes to a debt management plan, some creditors definitely do agree to freeze interest and charges but they are not obligated to do so. 

You may find that some creditors might refuse to stop charging interest on your debt repayments when you enter into a DMP. 

Furthermore, since you have to pay off the entirety of your debt in a debt management plan, you may end up paying back a much higher amount overall than what you initially borrowed. 

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Legal Protection 

Of course, the main source of stress that debtors have is any potential action that could be taken by their creditors. 

If you’re having trouble paying back your debt, you’re going to be worried about receiving a notice of court action from any of your creditors. This is usually a County Court Judgement (CCJ).

An IVA is great in this regard because it’s a legally binding solution.

As soon as a majority of your creditors agree to your IVA proposal, it is put in place and then, all of your creditors have to abide by it. 

This means that they are not allowed to take any sort of legal action against you.

This includes petitioning to make you bankrupt, pursuing a County Court Judgment (CCJ) against you or any other court action. 

Furthermore, in an IVA, your creditors are not even allowed to contact you in regards to your payments. They are required to relay communication through your insolvency practitioner (IP).

Your insolvency practitioner is a licensed individual that handles your IVA from start to finish. 

When it comes to a DMP, creditor contact often ceases or becomes less once it is put in place. However, your creditors are under no obligation to stop contacting you. 

You may still receive calls from your creditors regarding your payments. 

Furthermore, a DMP also does not prevent a creditor (or creditors) from pursuing legal action against you. So, in theory, at any point, any one of your creditors could decide to stop your DMP and pursue bankruptcy against you. 

Protection of Assets 

Many people are worried about their assets being seized whenever they are choosing between debt solutions. 

The great thing about IVAs is the fact that once an IVA is put in place, all of your valuable assets are protected.

This is actually one of the main reasons why so many debtors prefer getting an IVA over declaring bankruptcy. 

However, there are certainly some things you need to keep in mind if you are a homeowner opting for an IVA: If you have a home with a significant amount of equity in it, you will be required to release some or all of it during the final year of your IVA. 

If you don’t have a home or don’t have any equity in your home, then you will be required to continue your IVA for another year. Thus, the duration of your IVA would be extended to six years. 

When it comes to a debt management plan, it’s an informal agreement. This means that it does not guarantee the protection of your assets. 

At any point, your creditors could decide to pursue court action and send bailiffs to your home.

These bailiffs could then seize your assets and sell them off in order to pay for your debts. 

That being said, this is often quite unlikely to happen as long as you keep making regular monthly payments towards your debt management plan. 

This is because your creditors are likely to recover more of what you owe them through monthly payments towards your DMP rather than going through the process of pursuing legal action to seize your assets. 

Will an IVA Affect My Job?

No, usually an IVA will not have any impact on your job.

However, if you are an accountant or a solicitor you may face extra conditions or will have to stop working.

You may need to notify your employer if you work in other areas of financial services or if you are part of a regulatory body that mentions IVAs in their terms.

When in doubt check your contract.

Your employment contract will have all of the terms of your employment – including whether you can work in your current role during your IVA.

Will a DMP Affect My Job?

No, a DMP will not affect your job.

You can check the terms of your employment in your contract but as a DMP is much less formal than an IVA, it is very rare that it will have any impact on your professional life.

Credit Rating 

Both an IVA as well as a DMP have a negative effect on your credit rating. That being said, the way in which they affect it is slightly different. 

When you’re in an IVA, you cannot obtain credit of more than £500 without the permission of your IP.

Furthermore, even if you get permission for it, you will find that you’ll have a lot of trouble finding a lender that is going to approve you for any type of credit. 

An IVA stays in your credit file for 6 years. The 6-year timer starts on the date that it was approved.

With a DMP, you are not restricted from taking out further credit but it’s typically not a good idea to do so. 

A DMP also has a negative effect on your credit rating as you’re making reduced repayments towards your debt. The mention of these reduced repayments stays within your credit file for 6 years. 

Will Either Debt Solution Affect Future Borrowing?

Yes, having a DMP or an IVA can affect borrowing in the future.

Partly because both an IVA and a DMP will have a negative impact on your credit score. A lower credit score makes it more difficult to easily get credit.

There are credit products specifically for people with poor credit scores, but these are often higher in interest.

A DMP and an IVA will both be visible on your credit file for 6 years – an IVA will be noted, but a DMP will appear as reduced payments.

Securing credit while these notes are visible will make it more difficult to get good credit as you are a ‘high-risk’ customer.

References

1. StepChange – Credit safety net report