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Tackling your debts

Is an IVA the same as a Debt Management Plan?

Posted 20 October 2016

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Learn the difference between an IVA and a Debt Management Plan.

If you’re not familiar with the world of debt solutions, the different terms and what they mean can be confusing. We’re here to explain everything in straightforward terms and today we’re looking at the difference between a Debt Management Plan (DMP) and an Individual Voluntary Arrangement (IVA). 

Are they the same solution?

An IVA and a Debt Management Plan are two separate solutions. There are some important differences between them and which one is right for you just depends on your personal circumstances. 

Let’s explore the differences between them. 

 

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How does a Debt Management Plan work?

A Debt Management Plan (DMP), is an informal agreement that you come to with your creditors to repay your unsecured debts at a lower rate than you originally agreed to. You would start this solution if you were struggling to repay your debts at the rate they’re set at, but you could repay everything you owe if the monthly amount was lowered. 

Because a DMP aims to allow you to repay everything you owe and because everyone’s debt level is different, there is no set time that this solution has to last for. 

Because this solution is informal, your creditors are under no legal obligation to freeze your interest and charges on your debts. Having said that, in many cases the creditors do agree to do this if they can see that you are struggling to repay your debts and this would help you get on top of them. 

In order to lower your payments on your unsecured debts, you don’t have to use a debt solution provider. In some cases, it’s possible to contact your creditors individually and negotiate a lower payment with them all, if you can prove that you can’t afford the repayments. However, some people find it’s easier to use a debt solution provider to deal with the whole process for them and so they only have to send one payment per month to them instead. The debt solution provider will then distribute this to their creditors on a pro rata basis, meaning the creditor who is owed the most will get the biggest payment and so on and so forth. 

There are free and fee charging debt management companies, and it’s important that you understand the fees you’re expected to pay before you go ahead with anything. 

How does an IVA work?

An Individual Voluntary Arrangement (IVA), is a formal debt solution, as opposed to a DMP which is informal. An IVA is a method of dealing with your unsecured debts if you are insolvent. Being insolvent means that you are not able to afford your debts when they are due, or that your assets are worth less than your debts. 

An IVA lasts five to six years, so if everything goes to plan you will have a date when you know you will be debt free. As we said before, a DMP will last for however long it takes to allow you to repay everything that you owe. 

This brings us on to another important difference between the solutions. With an IVA you are not expected to be able to pay off everything that you owe. If you successfully stick to the rules of this agreement and everything that needs to be paid into the IVA is paid in, the rest of your unsecured debts will be paid off when it ends. 

Unlike a DMP, there is no way for you to arrange an IVA yourself, directly with your creditors. You would need an Insolvency Practitioner to set one up for you. 

If you’re a homeowner, you need to be aware of the implications of starting an IVA as opposed to a DMP. Six months before the end of your IVA you may have to attempt to remortgage your home so that you can put the money into your IVA. You’d never be expected to release more than 85% of the value of your home. You also won’t be expected to remortgage if your repayments would end up being more than 50% of what you’re paying into your IVA each month. There are some situations when you’re not expected to remortgage at all and when you wouldn’t be expected to remortgage to the full 85% - this will all be explained by your debt advisor. If you’re not able to remortgage, your IVA would be extended to up to another 12 months instead. 

An IVA also provides legal protection, as your creditors have to stick the terms of the agreement and are not allowed to take further legal action against you once it goes ahead. They also have to freeze interest and charges (creditors may choose to with a DMP, but they are not obliged to.)

Are there any similarities with the solutions?

The main similarity between these two solutions is that they both give you the opportunity to lower your monthly payments on your unsecured debts, freeing you from the worry of unmanageable repayments. So with both these solutions you need some money available to put towards your debts each month. 

What you pay on a Debt Management Plan (DMP) and an Individual Voluntary Arrangement (IVA) depends on your disposable income. Your disposable income is the money you have left over when all your other essential outgoings have been accounted for. When you speak to a debt advisor, they will ask you some questions about how much you’ve got coming in and going out. They will then be able to work out what your disposable income is. 

So whether you start an IVA or DMP, the aim is for you to be contributing monthly towards your debts (for five to six years with an IVA), in a way that’s affordable to you and fair to your creditors. 

Both these solutions will appear on your credit history for however long they happen to last for and for a minimum of six years. This means that if you apply for credit you may have to pay a higher rate of interest or you may be rejected altogether, as the lender will be able to see that you’ve had trouble repaying debts in the past. This can also affect other types of agreements, like mobile phone contracts and tenancy agreements. 

Find out which one is right for you

To find out more about how these and other solutions work, visit our dedicated pages. It’s important you speak to an expert before you make any decisions about debt solutions. When you’re ready to do this, you can use any of the options at the bottom of the page and come straight through to an advisor here at Debt Advisory Centre. There may be fees associated with some solutions once they’re up and running, but the initial advice and recommendation is always free of charge. 

 

by Christine Walsh

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.