If you’re struggling with debt in the UK, there are a number of options available to help you manage and eventually pay off what you owe. Two common solutions are the Individual Voluntary Arrangement (IVA) and the Debt Management Plan (DMP).
While both of these debt solutions can be effective, they differ in key ways.
What is an Individual Voluntary Arrangement (IVA)?
An Individual Voluntary Arrangement (IVA) is a legally binding agreement between an individual and their creditors to pay off their unsecured debts over a fixed period of time, usually five to six years.
It is a form of debt solution available in the UK that is designed for people who are struggling with unmanageable levels of debt, but who still have a regular income. With an IVA, a licensed Insolvency Practitioner will negotiate with the creditors on behalf of the individual, to come up with a repayment plan that is affordable and sustainable.
Once agreed upon, the individual will make regular payments to the insolvency practitioner, who will distribute the funds to the creditors. At the end of the agreed period, any remaining debt is typically written off.
What is a Debt Management Plan (DMP)?
A Debt Management Plan (DMP) is an informal debt solution that helps individuals manage their debt repayments. It is a flexible agreement between the individual and their creditors, which allows the individual to make reduced monthly payments based on what they can afford.
A DMP is typically suitable for people who are struggling with unsecured debts, such as credit card debts, personal loans, or overdrafts, and who cannot meet their current debt repayments.
Unlike an IVA, a DMP is not legally binding, and creditors are not obliged to agree to it. That said, it can be a useful way for individuals to take control of their debt and make more manageable payments, while avoiding more serious debt solutions like bankruptcy.
DMP or IVA: Key differences
While they’re both popular debt solutions, there are some key differences between IVAs and DMPs that you should be aware of before deciding which is best for you.
We’ve outlined some of the key differences below.
Debt level: An IVA is generally only suitable for people with debts over £6,000.
Income: You must have a regular income that will allow you to make regular repayments.
Debt types: An IVA is only suitable for unsecured debts, such as credit cards, personal loans, and overdrafts. Secured debts, such as mortgages and car loans, cannot be included.
Number of creditors: An IVA requires agreement from at least 75% of your creditors by debt value.
Debt level: DMPs are generally suitable for people with debts of any amount.
Income: You must have a regular income that will allow you to make regular repayments.
Debt types: DMPs are suitable for unsecured debts, such as credit cards, personal loans, and overdrafts. Secured debts, such as mortgages and car loans, cannot be included.
Number of creditors: There is no minimum or maximum number of creditors required for a DMP.
Set up of debt solution
Insolvency Practitioner: An IVA requires the involvement of a licensed Insolvency Practitioner who will assess your finances, negotiate with creditors, and manage the arrangement. The Insolvency Practitioner will also charge a fee for their services, which is typically included in the monthly payments.
Proposal: The Insolvency Practitioner will help you draft a proposal that outlines your financial situation and proposed repayment plan. The proposal will then be sent to your creditors for their approval.
Creditor agreement: At least 75% of creditors by debt value must agree to the proposal for the IVA to go ahead.
Debt management company or DMP provider: A DMP can be set up directly between you and your creditors or through a debt management company or DMP provider.
Proposal: You will need to provide details of your income and expenditure to your creditors or the DMP provider, who will use this information to negotiate a repayment plan on your behalf.
Creditor agreement: Your creditors are not legally required to agree to the proposed repayment plan, but they may be more likely to accept it if you are making regular payments.
Legally binding status
Legally binding agreement: An IVA is a legally binding agreement between you and your creditors. Once the IVA is approved, the creditors are bound by its terms, and cannot take any legal action against you.
Protection from creditors: While the IVA is in place, your creditors cannot contact you or take any legal action against you to recover the debt included in the IVA, and the arrangement will also freeze interest rates and charges on your debts.
Write off of remaining debt: At the end of the agreed-upon period, any remaining debt included in the IVA is typically written off.
Informal agreement: A DMP is an informal agreement between you and your creditors or a debt management company or DMP provider.
No legal protection: A DMP is not legally binding, so your creditors can still take legal action against you to recover the debt included in the DMP.
No write off of remaining debt: A DMP does not typically include a write-off of any remaining debt at the end of the repayment period.
Affordable monthly payments: In an IVA, the Insolvency Practitioner will negotiate with your creditors to come up with a repayment plan that is affordable and sustainable based on your income and expenditure. The monthly payments are usually fixed for the duration of the IVA, which is typically five to six years.
Regular payments required: You will need to make regular payments to the Insolvency Practitioner, who will distribute the funds to your creditors.
No changes to payments without agreement: The monthly payments cannot be changed without the agreement of the Insolvency Practitioner and your creditors.
Potentially reduced payments: In a DMP, your creditors may agree to reduced monthly payments based on what you can afford.
Flexible payments: The payments in a DMP are more flexible than in an IVA. You can make payments directly to your creditors, or through a debt management company or DMP provider.
Changes to payments possible: The payments can be adjusted as your circumstances change, but you will need to keep your creditors or DMP provider informed.
Length of payment term
Five or six years: An IVA typically lasts for five or six years, during which time you will make regular payments to the Insolvency Practitioner, who will distribute the funds to your creditors.
Until debt is repaid in full: Debt Management Plans typically last until all of your debts are repaid in full. This means that the duration of the DMP can vary significantly, depending on the amount of your debts, the monthly payments, and the interest rates.
Protected: In an IVA, your assets are generally protected, as long as you continue to make the agreed-upon monthly payments. Your home and other assets are not at risk, provided that you keep up with your mortgage payments and other secured debts.
May have to release equity: In some cases, you may be required to release equity from your home to help repay your debts. This will be determined on a case-by-case basis and will depend on the level of equity available in your home.
No protection: In a DMP, your assets are not protected, and your creditors may take legal action to recover their debts, including repossessing your home or other assets.
Impact on credit rating: An IVA will have a negative impact on your credit rating, as it will be recorded on your credit report for six years from the start of the arrangement.
Limited access to credit: During the IVA, you will have limited access to credit, and any credit you are offered is likely to come with higher interest rates and stricter terms.
Improved credit rating after completion: Once the IVA is completed, your credit rating will start to improve, and the negative information will be removed from your credit report after six years.
Impact on credit rating: A DMP will also have a negative impact on your credit rating, as it will be recorded on your credit report. However, the impact is likely to be less severe than with an IVA.
Access to credit: You may still be able to access credit while on a DMP, but any credit you are offered is likely to come with higher interest rates and stricter terms.
Improved credit rating after completion: Once the DMP is completed, your credit rating will start to improve, and the negative information will be removed from your credit report.
Should I choose an IVA or DMP?
The decision to choose an Individual Voluntary Arrangement (IVA) or a Debt Management Plan (DMP) ultimately depends on your individual circumstances. It’s important to consider the key differences between the two debt solutions before deciding which is best.
It’s highly recommended that you seek free debt advice from a reputable source such as a debt charity, as they can provide impartial advice on the most suitable debt solution for your situation.
A debt advisor can assess your income, expenses, and debts and provide you with all the information you need to decide which debt solution will help you work towards a debt-free life.