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Debt Management vs Individual Voluntary Arrangement

Debt affects thousands of our UK friends and family each year. Life is expensive, with increasing housing costs, transportation, and more.

Luckily, relief options exist. Many businesses and organizations offer debt solutions including:

  • credit counselling agencies
  • debt charities
  • nonprofit organizations
  • debt settlement companies
  • debt management companies, and
  • government agencies

Some examples of debt solutions available to UK residents include:

  • Debt consolidation loans
  • Individual voluntary arrangements
  • Debt management plans
  • Debt relief orders

Curious about the debt repayment plans available to you? Let a trained counsellor help!

What is an Individual Voluntary Arrangement?

An Individual Voluntary Arrangement (IVA) is a formal debt solution that supports people in repaying their debts, without the fear of receiving any legal action from their creditors. Specifically, an IVA is a formal contract between a borrower and their creditors. In addition, it describes a mutual agreement on how the borrower will repay their debts. As a result, repayment could be in the form of a lump sum payment, regular monthly payments, or both. An IVA is legally binding and authorized and regulated by the Financial Conduct Authority, so you cannot just cancel one whenever you’d like. 

Introduced in 1986 through the UK’s Insolvency Act, IVAs are legal contracts that must be established by a licensed insolvency practitioner (IP). Of course, they are the UK counterparts to our Licensed Insolvency Trustees. Similarly, the IP will help you put together an IVA proposal, detailing the amount you propose to pay your creditors to eliminate your debt. As a matter of fact, they communicate, and in some cases, negotiate with them. The IP also makes monthly repayments to your creditors on your behalf throughout the course of the IVA, which usually lasts a few years. 

Advantages and Disadvantages of an IVA

Pros:

  • Legally binding, meaning creditors can’t take legal action against you during the course of an IVA
  • Creditors discharge all debt after the IVA is complete
  • Removed from the Individual Insolvency Register in England three months upon completion of the arrangement
  • Requires creditors to freeze interest and charges on your debts
  • Includes priority and non-priority debts in one monthly payment, making it easier to budget

Cons:

  • Legally binding, meaning you cannot exit the contract whenever you’d like
  • Costly – IP fees are high
  • There’s a chance of requiring personal pension for monthly repayments to creditors
  • It may fail if your personal circumstances change i.e. you lose your job and can’t make payments
  • Hurts your credit rating

What is a Debt Management Plan (DMP)?

A debt management plan is an informal agreement between a borrower and their creditors to repay non-priority debts through monthly payments. Furthermore, DMPs are established by a borrower and a debt management company, which contacts and pays a borrower’s creditors on their behalf. The borrower pays a set amount once a month, and that amount is divided amongst their creditors. 

Examples of non-priority debts, or unsecured debts,  that qualify for repayment under a debt settlement plan are:

  • Credit card debt
  • Personal loans
  • Overdrafts
  • Unpaid parking tickets

Nevertheless, priority debts are usually ineligible for repayment under a DMP. These debts are either secured debts or debts where court action took place. If you have a DMP agreement, make sure you have enough room in your budget to also make your monthly payments on priority debts separately.

Types of Priority Debts

Some examples of priority debts include:

  • Mortgage payments or rent arrears
  • Utility arrears
  • Taxes
  • TV Licence or TC Licence arrears
  • Court Fines

It’s important to note that DMPs aren’t legally binding, which means that you have flexibility in changing your mind and exiting the agreement. 

Here are some pros and cons of DMPs:

Pros:

  • Not legally binding, so you can leave the arrangement anytime 
  • Cheaper than an IVA, as debt management company fees aren’t as pricey as those of an IP
  • Monthly payment makes it easier to budget

Cons:

  • Creditors aren’t obligated to freeze the interest and charges on your debts, which can cost you more
  • Hurts your credit rating
  • Doesn’t include priority debts, which you still need to pay separately
  • Vulnerable to possible legal action from creditors

Is an Individual Voluntary Arrangement the Same as a Debt Management Plan?

No. Regarding debt management vs individual voluntary arrangements, they’re similar. However, there are a few key differences. For example, both arrangements help you affordably repay debts to your creditors. Considering these points, IVAs are legally binding, while DMPs are informal arrangements. 

Comparison Chart – Debt Management vs Individual Voluntary Arrangement

IVADMP
Last a few years (usually 5)Continue until the debt (including interest and charges) is fully paid
Creditors cannot take legal action against a borrower Creditors can pursue legal action
Creditors cannot contact youCreditors can contact you anytime
Legally binding, meaning creditors cannot modify the agreement after they accept itCreditors can dictate changes to a DMO
You can write off a large portion of your debtAll debt must be repaid

Final Thoughts

There is no blanket answer in deciding between debt management vs individual voluntary arrangements. Besides, IVAs are strictly for UK citizens. While we share many viewpoints and policies, our financial laws are different. Ultimately, there are similarities in processes, terms, and laws.

Obviously, if you’re struggling with debt and are seeking debt advice, or considering debt solutions to find long-term relief, we can help. Speak to a skilled credit counsellor today. 

A trained counsellor can tell you your repayment options.

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