If you’re looking for a debt management solution, you might be wondering whether to choose an individual voluntary arrangement or DMP? Our guide to IVAs and DMPs will help you decide the right option for you
What is an individual voluntary arrangement?
An individual voluntary arrangement (IVA) is a formal debt management solution that helps you make regular payments to cover all or part of your debt. Available in England, Wales, and Northern Ireland, IVAs typically last for between five and six years and the amount that you’ll pay each month is based on how much you can afford.
Once your IVA proposal has been approved by 75% or more of your voting creditors, the agreement will be listed on the IVA register and legally protect you from being pursued further. And if you keep up with your repayments throughout but haven’t cleared all your debt when the IVA comes to an end, any remaining unsecured debts will be written off.
What is a debt management plan?
A debt management plan (DMP) is an informal debt solution designed to help you pay back your debts at an affordable rate over a reasonable length of time. DMPs don’t usually last any longer than 10 years and are best suited to those who are struggling to keep up with their repayments but can still cover priority bills like a mortgage, rent, council tax, and utility bills. While they’re not obligated to agree to it, most creditors will accept a DMP and may agree to stop or reduce interest charges during the agreement. Your DMP will continue until you’ve paid back all the outstanding debt, including any interest and additional charges.
What’s the difference between an IVA and a DMP?
While IVAs and DMPs are both debt management solutions that help you make affordable repayments, there are several differences between the two. The biggest difference is that an IVA is a legally binding solution while a DMP is an informal agreement. There are advantages and disadvantages to this; informal arrangements don’t prevent your creditors from contacting you or pursuing further legal action, for example, while under the terms of an IVA, your creditors can only send statutory letter but are not able to continue to chase for you a payment and will have to formally apply if they want to make any changes to the agreement once it’s underway.
However, as the less formal option, DMPs can be more flexible. If your circumstances change suddenly, you lose your job or get hit with an unexpected bill, you can approach your creditors with a new payment plan. IVA repayments are fixed throughout the term and can only be reduced by a set percentage or paused for a certain amount of time.
How do I apply for an IVA or DMP?
Individual voluntary arrangements can only be secured through a qualified insolvency practitioner. It’s their job to draw up your IVA proposal, liaise with your creditors, and collect and distribute your debt repayments. In contrast, you can manage a debt management plan yourself. There are also no strict eligibility rules when entering a DMP and you may be able to take out more forms of credit during the agreement. An IVA comes with more conditions: you must have at least £6,000 of unsecured debt, owe money to two or more creditors, and be able to afford monthly repayments.
Once you’ve appointed an insolvency practitioner, they’ll organise a meeting of creditors where the terms of the IVA can be agreed by 75% of your voting creditors. A DMP doesn’t require all creditors to agree, but the solution will need to be proposed to each individual creditor separately.
Can I change from DMP to IVA?
We understand that life can be unpredictable, and your financial situation can change over time. If you’ve been in a DMP for a while but are struggling to keep up with your debts, you might find that it isn’t the best solution for you anymore. You can change from a DMP to an IVA at any time. Simply contact a qualified Insolvency Practitioner to get started. It’s worth keeping in mind, however, that terms and conditions to apply. Check that you meet the eligibility requirements for an IVA and remember that most of your creditors will need to agree with the proposal for the arrangement to begin.
Will an IVA or a DMP affect my credit score?
Every debt management solution will influence your credit score, at least in the short term. Individual voluntary arrangements will stay on your credit report for six years after your agreement ends and could affect your ability to secure a loan during that time. Debt management plans are more unpredictable. As there are no legal protections with a DMP, if you fall behind with your repayments, you could receive a default or a County Court Judgement. These can also be listed on your credit report for six years.
Should I choose an IVA or DMP?
The right debt management solution for you will depend on you and your individual circumstances. You should consider how much you owe, the type of debt you have, how much you can afford to pay, your current job, any existing assets you own, and whether your situation could change in the next few years.
A debt advisor can offer personalised advice, but a good rule of thumb is that a DMP is a good temporary solution. It’s flexible, you can end it whenever you like, and you have no obligation to release equitable interest or any other assets.
If you need a more robust debt solution, an IVA will offer more legal protection. Your assets will be protected (although you may need to release equity from your home) and your creditors won’t be able to contact you or start any legal proceedings during the agreement. You can also write off any outstanding debt when the agreement ends.
Could an IVA or DMP be the best choice for you? Our friendly debt advisors are here to help you make an informed choice. Find out more by calling 0161 8260 585 or send us an email here
