Many individuals are confused about the differences between a Debt Management Plan vs IVA. These are two debt solutions that are most common. Both can be an ideal debt solution but it’s important to understand how they work. An IVA is a legal agreement between creditors. Debt Management Plans are more flexible. There are pros and cons to both.
There are several distinctions between an IVA and a debt management plan. In reality, there are a few major distinctions between the two, as follows.
Length of time
An IVA is a legal procedure that allows individuals to set up a plan when they cannot afford to pay their unsecured debt. All unsecured debts must be included in the IVA. Creditors agree to write off any remaining debt after the IVA is completed. It will generally last 5 years. A DMP is permanent and only ends when all debts are paid back in full. When an IVA completes it remains on the Insolvency Register on for a further three months; whereas a DMP is confidential from start to finish.
Legally binding
An IVA is a legally binding agreement, a DMP is a more informal debt solution. Being in an IVA can work to your advantage because creditors are unable to impose any additional costs, take further action, or contact you in any manner under the law. Creditors aren’t bound by law to any contract with a DMP, so they may pursue you for the money at any time – including having debt collectors call you or send you emails or letters.
Repayment amount
You’ll be required to repay your debt in your DMP until it’s all paid off, but an IVA will write off part of your debt. If you have an IVA, creditors are unable to impose any more interest rates or costs on your debts, however, they can if you have a DMP. The repayment amount in both is based on what you can afford after paying your household bills such as rent, council tax, food etc.
Credit rating
An IVA is reported by your credit reference agencies for six years and, if you have a five-year IVA, will stay on your credit file for a full year. If your IVA is longer than seven years, it will be reported for seven years by your credit reference agencies.
You’ll effectively be starting from scratch after your IVA has ended and it’s been removed from your credit report. However, if you opt for a DMP, you’re at risk of having your account being in default since some creditors may refuse to accept your payment plan even though you are paying them on time. Any default notifications will remain on your credit report for 6 years after the date of issue.
Creditors Acceptance
An IVA requires 75 per cent of the amount of debt to agree before it may proceed, whereas a DMP does not necessarily need creditor approval to move forward. Even if your creditors do not approve your plan, you can still make payments to them using a DMP. If you choose a DMP provider, he will continue to pay your creditors whether or not they have approved the plan.
What Debts Can I include?
Debts included:
- Personal unsecured loans
- Payday loans
- Credit cards
- Store cards
- Bank overdrafts
- Catalogue debts
- Personal guarantees
Debts excluded:
- Mortgage
- Secured loans
- Student loans
- Court fines
Minimum debt amount and Eligibility Criteria
If your debt is £7,200 or more then you’re likely to be approved for an IVA – especially if you receive a regular, stable income and can make a monthly payment. With a DMP you can owe any amount of money – making it a flexible option for those of you with debts under £7,200.
IVA or DMP?
IVA Advantages
- Make affordable monthly instalments
- Creditors agree to freeze interest during the term and the outstanding balances written off once your IVA completes
- Your creditors will not be able to contact you
- With Become Debt Free there are no up front fees to pay in setting up an IVA – not all Insolvency Practitioners are the same
- Homeowners are eligible for an IVA with your asset normally protected
- There is flexibility during the IVA so that if your circumstances change, your IP can reassess your situation and contact your creditors to seek changes
- The costs of an IVA are agreed with your creditors and are drawn from your affordable monthly payments
IVA Disadvantages
- If you stop making payments, the IVA could fail and you will have to start dealing directly with your creditors again
- Your credit file will be damaged for 6 years and you will be unable to apply for any significant credit whilst in an IVA
- Details of the IVA will be recorded on the Insolvency Register until 3 months after it has been completed
- An IVA cannot include any court fines you may owe or any secured loans
DMP Advantages
- Flexibility – The agreement can be changed at any time
- You make affordable monthly payments
- Not all your debts have to be included
- No obligation to release equity from your property
- A DMP is not a formal insolvency procedure
- Debt payments reduced to an affordable amount
DMP Disadvantages
- Although your monthly repayments are reduced you still have to repay all the debt you owe
- Your credit rating is negatively affected
- Interest and charges can still be added to your accounts
- Creditors can ask for increased payments at any time
- No legal protection for you or your property
Is an IVA or a DMP right for me?
An Insolvency Practitioner is fully qualified and licensed by their regulatory body to assist in providing debt advice and can prepare the legal paperwork in place to set up a DMP or an IVA.
Whether you’re thinking about an Individual Voluntary Arrangement (IVA) or a Debt Mangement Plan (DMP), you’ll need expert debt advice and assistance from an Insolvency Practitioner to make the best decision.
An IP will help you choose the solution that’s right for you depending on your financial circumstances They will look at how much disposable income you have free, and debt that you owe and what assets you own.
At Become Debt Free, we can discuss your circumstances with you and assist you in choosing the best solution for your needs. For more information on IVAs look at our page dedicated to the topic here.
If you wish to look at more information on Debt Management Plans click here.
The government also has information related to both the IVA and DMP which can be found here.
Get in touch for free advice by leaving an enquiry and one of our team will call you back and go through things to find the best debt solution for you.
You can also call us on freephone 0800 169 1536.
If you prefer to speak to one of our team through WhatsApp, our number is 07762 145 581.
