Debt solutions: IVAs vs. DMPs

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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.

Rosie Percy writes for a diverse range of topics and industries including education, health and finance. Rosie has written for the Guardian and other lifestyle blogs, and now lives and works in Brighton.

Advantages and Disadvantages to an IVA

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The Individual Voluntary Agreement, or IVA, has just reached its twenty-fifth birthday, after being introduced in 1986 as a type of debt management solution. Available to people in England, Wales and Northern Ireland, IVAs can help debtors escape insolvency. They are designed to assist people with unaffordable, out-of-control debts by arranging a reduced monthly payment plan with creditors.

More details about IVAs

IVAs are legally binding, but they are generally considered to be a more attractive insolvency scheme than bankruptcy. If followed properly, IVAs can support you in clearing your unsecured debts by providing you with the opportunity to make lower monthly payments into the managed IVA scheme, for an agreed period of time, which is usually five years.

Provided that you stick to the arrangement, which typically means honouring a reduced-rate monthly repayment plan, the remainder of the original debt will be written off at the end of the term and you'll be free from unsecured debt. The scheme is designed to assist people who owe significant levels of unsecured debt to a number of lenders who they cannot afford to repay. It's essential that you are still able to meet the new, reduced payments each month and commit to the scheme for five years. The agreement is legally binding and will be managed by an insolvency practitioner.

What are the benefits of an IVA?

There are several key benefits. An IVA can freeze the interest on your debts, which can otherwise mount up. It also protects you from further action or legal intervention from your lenders. This can greatly relieve pressure. It also allows you to avoid experiencing some of the more challenging aspects of bankruptcy, which can include the repossession of your property. It also means that you have a clear date for becoming debt free, which is usually a five-year period and you only need to deal with one scheme and one IVA company, rather than an array of lenders.

Are there downsides to an IVA?

With all insolvency schemes there are important points to consider. First, you may find that you're obliged to release equity from your property in month 54 of the IVA arrangement. You will also be prevented from taking out additional credit during the IVA period. You'll be forced to enter bankruptcy if you fail to adhere to the agreed conditions and terms of the arrangement, in which case your IVA will fail. Your IVA will also stay on your credit record for a year after it has finished, which can make it difficult for you to obtain credit.

If you feel that this scheme is appropriate for your requirements, you can find a company who provide IVAs pretty easily, as there are plenty of online and high-street firms offering such services. It's worth asking at your citizen's advice bureau for advice before entering into an IVA.

What next?

As with any kind of debt solution, it's essential that you get advice that is relevant to your situation. Speak to a qualified debt adviser and find out whether you meet the terms and conditions of the scheme. Check too that you understand the full implications of taking out an IVA and seek a reputable organisation with good feedback to manage the scheme for you.

Written by writer of a company who provide IVA's.