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Photo courtesy of abcdlish (flickr)
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If you are struggling with unresolved debt, it may be difficult to envisage a future free from financial strain and overdue payments. Bankruptcy may often be considered the only viable option by those so overwhelmed by debt that it feels impossible to escape, but there are less drastic alternatives available.
For example, an Individual Voluntary Arrangement (IVA) is a legally binding insolvency agreement made on behalf of the debtor to their creditors to arrange affordable regular repayments. IVAs are obtained through insolvency practitioners, who will make the necessary arrangements with your creditors regarding what you can afford to repay and how long the term of your IVA will last.
An Individual Voluntary Arrangement is not to be confused with a Debt Management Plan (DMP). Although the two are similar in that they offer an alternative solution to bankruptcy, a DMP is an informal agreement that is more flexible to an IVA in that repayments can be negotiated and there isn’t a minimum amount of debt required to set up a DMP.
Your situation will depend on what solution is best for you; this can range from how much you can afford to pay to how much you owe. If you are considering taking action against your outstanding debts, it is important to consult a professional debt solution service first to explore all avenues available to you.
What are the key differences between an IVA and a DMP?
• You can administrate a DMP yourself free of charge, you can’t with an IVA
As an IVA is a legal form of insolvency, it needs to be processed by an Insolvency Practitioner which will incur administration fee, and also further handling fees whenever a payment is made. A DMP can be set up by the debtor discussing the repayment plan directly with their creditor, or via a debt charity which is usually free of charge.
• An IVA can write off some of your debt, but a DMP cannot
As an IVA is a legal form of insolvency, an arrangement is made to make regular and affordable payments towards clearing debt over a set period of time (usually 5 years). If at the end of this period there is still debt outstanding, it will be written off. As a DMP is set up for the debtor to repay all, not some, of their debt, there is a no set time period. If reasons occur that delay repayment, the agreement will be extended until all debt is cleared.
• An IVA will protect you from creditors, a DMP may not
Once an IVA has been administered, your creditors should no longer contact you regarding the amount owed. However creditors can continue to chase you for extra payments and continue with debt recovery proceedings if you are part of a DMP.
• An IVA will freeze charges and interest, but a DMP may not
When you enter into an Individual Voluntary Arrangement, all charges and interest from creditors will be frozen to allow you to pay back the amount owed without adding to it. A Debt Management Plan will not necessarily do the same, as creditors are not obligated to agree to freeze these charges. This therefore means that as your DMP starts, you may notice that your monthly payments are higher than usual due to interest being charged, but this will reduce as your creditors see that you are making regular payments.
• Repayments for an IVA are not very flexible, whereas they can be for a DMP
An Insolvency Practitioner will be issued to you when you apply for an IVA to calculate what you can afford to pay a month. These payments aren’t that flexible, but can sometimes be paid within a 15% margin of the fixed amount. As a DMP has no set time period, payments have more scope to vary as the repayment term can be extended until the debts are cleared. However, you will need to inform your creditors of any changes to your repayment plan, and they are not obligated to accept them.