When it comes to repaying debts in affordable monthly payments, most people will typically have two options - an IVA or a Debt Management Plan (DMP). But, what is the difference between the two, and how might you decide which is the right path for you? For those seeking assistance in deciding, the team at NDH Financial are here to help. Let’s take a look at how.
What Is the Difference Between an IVA and DMP?
Both an individual voluntary arrangement (IVA) and a debt management plan (DMP) are ways that you can pay off your debts using affordable monthly payments. However, there is one big difference between an IVA and a DMP - that is the formality and legality of the arrangement, which you can find out more about below.
Individual Voluntary Arrangement (IVA)
An IVA is a form of insolvency, and so it is a formal legally binding arrangement between you and your creditors. You will have a binding agreement for your debt repayments to be made in monthly instalments based on your affordability for a set, definite period of time, usually 60 to 72 months. Alternatively, it can be based on a one off lump sum offer.
As it is a form of insolvency, you will be added to the insolvency register, which your creditors can check, and helps reduce creditor contact and harassment. In fact, there should be no action by creditors, or contact from creditors, during the 5 to 6 years of your IVA, although creditors will still be required to send you annual statements.
You can only get an IVA through a licensed insolvency practitioner, such as us here at NDH Financial. A licensed insolvency practitioner, and their team, will work with you to determine an affordable payment to offer to your creditors, prepare the paperwork, and then contact your creditors to seek the approval of your proposal. Provided 75% or more of the creditors who respond approve the proposals, the IVA will be accepted, and all other creditors will be bound by it.
If approved, you will make monthly payments for 5 to 6 years to your insolvency practitioner, who will deduct their fee, and distribute the remaining funds to creditors. After you have made payments for the agreed time, all remaining unsecured debt will be written off. There are some debts that cannot be included in an IVA, such as student loans, fines, or child maintenance arrears, and so they will remain outstanding after the IVA has been completed.
Debt Management Plan (DMP)
A Debt Management Plan is a debt solution that is an informal agreement between creditors and an individual. As they are informal arrangements, it relies on the individual creditors agreeing to the reduced payments, and there is nothing stopping them from contacting you. Despite this, most creditors will accept your payments through a DMP, and some will even agree to freeze interest and charges.
Although you can arrange reduced payments with your creditors, sometimes, creditors may be more willing to accept a DMP through a third party, such as debt charity or FCA registered firm.
A DMP can last for any reasonable time length, but is typically up to a maximum period of 10 years, allowing you to pay off your debts over time using affordable monthly payments. During this time, creditors can still contact you but may agree to stop or reduce their interest rates or additional charges whilst you are in a DMP.
How Do I Find Out If an IVA or Debt Management Plan Is Right For Me?
Before making any big financial decisions, you should always speak to a professional for assistance. You can get this for free from many debt charities and companies that provide solutions for people struggling with debt, like the licensed insolvency practitioner here at NDH Financial, or an Financial Conduct Authority (“FCA”) registered firm.
Charity providers, FCA registered firms and insolvency professionals will be able to provide assistance to those who have debts that they are not able to pay off, listening carefully to your personal circumstances. This allows them to identify tailored solutions to ensure that you choose an appropriate solution to suit your needs and circumstances. After you have identified the solution you wish to proceed with, the organisation will advise you of whether they are able to offer that solution, and if not, signpost you to the appropriate organisation.
Before they are able to identify appropriate solutions, the person you speak to will require the following things:
- The amount of debt, and the types of debts, that you have
- How the solutions might affect your life in the long term, such as whether it will affect loans for people, stop you from having to pay money to people, or affect future job offers
- How much money you can afford to pay towards paying off the debts you have
- Whether you are having difficult times right now but positive financial changes are on the horizon
The purpose of discussing these areas is to ascertain your current and future financial position so that appropriate solutions can be identified. Here at NDH Financial, we will treat you with dignity and respect at all times, no matter your past, present or future.
Can I Switch from an IVA to a Debt Management Plan?
The short answer is yes, you can switch from an IVA to a DMP. The longer answer is that the IVA does not automatically turn into a DMP, however, you can choose to exit the IVA and enter into a new DMP. The IVA would first need to be terminated, and you would then need to enter into a new DMP with a separate company, as the insolvency practitioner is unlikely to administer a DMP. In addition, as the IVA has been terminated, the creditors will add interest and charges to the outstanding debts, for the period the IVA was active.
However, just because it is possible does not mean that you should. Before you look to terminate the IVA and enter a DMP, you should carefully consider the potential consequences. As mentioned above, when the IVA is terminated, creditors can add interest and charges onto the debts, for the period the IVA was active, which will increase your outstanding debt, although creditors should account for any dividend they have been paid in the IVA.
Also, an IVA is a legally binding agreement between you and your credit providers. This means that you will no longer have the legal protection of the IVA, and although the majority of creditors will accept payments through a DMP, this is not guaranteed, and some may not agree to take further legal action, or freeze interest and charges. You should also remember that a DMP provider may charge you a fee for their service, although there are debt charities who will provide a DMP for no charge.
There are legitimate reasons for terminating an IVA, and entering a DMP. Sometimes people experience a change in circumstances after their IVA is approved. They may find that their circumstances have improved unexpectedly, and can afford to pay their debts in full, over a shorter period of time. In this case, the DMP allows you to pay off your debts quicker potentially for a lower amount as you do not have to pay the IVA fees on top of your debts, although the DMP provider may charge a fee.
Alternatively, you may find that your circumstances have got worse and you are no longer able to afford a sustainable payment in an IVA. Although a bankruptcy or Debt Relief Order (“DRO”) may be more appropriate at this point, your circumstances may mean that you do not want to proceed with either of these options, and therefore, you need the flexibility of a reduced payment through a DMP.
If you are considering switching from an IVA to a DMP, it is therefore incredibly important to speak to your insolvency practitioner first to explain why you believe the DMP is a more appropriate solution. Your insolvency practitioner will review your current circumstances, and if possible, offer you a solution that does not require the termination of the IVA, or inform you of any potential consequences that you would need to consider first. Once you have decided to terminate the IVA, you would then need to speak to a debt charity or FCA registered firm to agree the DMP.
Make the Next Steps to Get Rid of Your Debt
Being in debt can be a horrible experience, especially when it all becomes too much to handle on your own. But that’s where NDH Financial is here to help. If you are looking to find out what appropriate solutions are available to you, just get in touch to book a free, no-obligation appointment with our IVA consultants. With our help, you will be able to take the first step toward getting rid of your debts.