Debt management or an IVA?
We’re often asked about the differences between Debt Management and Individual Voluntary Arrangements (IVAs). It’s certainly true that there are some common elements, which is where confusion can arise. However, there are also a number of key differences which we will explain to help you consider which solution might suit you best.
Your debt amount and repayments
You’ll need to owe at least £3,000 in unsecured debts such as credit cards and loans to qualify for Debt Management. For an IVA, the amount owed will normally be at least £8,000, owed to at least two unsecured creditors.
With both solutions, you’ll need to be able to repay at least £100 a month. The amount you can afford to repay will be calculated by your debt adviser. They’ll also work out the proportion of each monthly payment that should go to each creditor. The resulting information will be used to create repayment proposals for your creditors.
Note that neither Debt Management nor an IVA can be used to pay off secured debts, such as mortgage arrears. You’ll need to pay these separately, or consider a solution which includes this type of debt, such as bankruptcy.
Informal vs. formal
Many people are attracted to Debt Management because it’s an informal option. It can be set up and managed without an Insolvency Practitioner (IP) or the courts. No one needs to know about your plan, so you can keep it private. You can cancel it at any time, or change the amount of your monthly payments if your finances change. However, the informal nature of Debt Management also means your creditors can still take you to court at any time.
On the other hand, an IVA is a formal solution that can only be set up and managed by an IP. Both you and your creditors are legally bound by its terms and they can’t take you to court once the IVA is in place. You’ll need to make all your payments on time and comply with the IVA’s terms, or your creditors could try to force you into bankruptcy. As with Debt Management, it may be possible to increase or decrease your monthly payments if your finances change.
You’ll need to pay set-up and management fees for both solutions. However, these will be included within your monthly payments. The fees involved are based on each persons individual circumstances.
Creditor acceptance and contact
As you’d expect from an informal solution, your creditors aren’t obliged to accept a proposed Debt Management plan. And whilst they may agree to freeze interest and charges, they’re not obliged to do so. However, our debt advisers will do our best to negotiate favourable terms. Even if not all your creditors accept our proposals, the plan may still go ahead. And once it’s in place, we’ll distribute your monthly payments and deal with your creditors on your behalf, making life a little easier for you.
For an IVA to go ahead, at least 75% of your creditors (by debt value) must agree to your IP’s proposals. If the IVA is approved, any creditors who voted against it will still be bound by its terms, and interest and charges on your accounts must be frozen. As with a Debt Management plan, your IP will take over all contact with your creditors and distribute your monthly payments on your behalf.
There’s no set time period for Debt Management – it depends on how much you owe and the new payment amounts that we’ll negotiate for you. Once the plan is in place, it will continue until your debts have been cleared in full. It’s important to note that you could end up making payments for longer, and repaying more in total, with Debt Management than under your original credit agreements.
An IVA runs for a set time period, usually 60 months. After this time, provided you’ve paid on time every month and complied with its terms, the IVA will end and any remaining unsecured debts within it will be written off. (This is why an IVA can be a better option for people with large debts that could take a long time to clear with Debt Management). However, if you miss any payments, your IVA may be extended or could fail.
You can apply for Debt Management or an IVA whether or not you own your home. An IVA is different from bankruptcy in that you can usually stay in your home. However, you’ll normally be asked to release equity or re-mortgage the property for the benefit of your creditors. If this isn’t possible, the IVA may be extended for another 12 months.
Choosing Debt Management can be more risky for homeowners as your creditors could try to repossess your home through the courts at any time. However, this is less likely if all your unsecured creditors accept the plan and you stick to your monthly payments.
Please note that, whatever happens with your Debt Management plan or IVA, you’ll still be at risk of having your home repossessed if you don’t keep up with your mortgage or other loan repayments that are secured on it.
Your credit rating
Both solutions are likely to affect your credit rating, although this may well be poor anyway. An IVA will remain on your credit file for up to six years from the start date, which could make it harder to get credit in the future. You’ll also be restricted from obtaining more unsecured credit during the IVA, as part of its terms.
With Debt Management, your plan won’t be mentioned on your credit file, but your loans and agreements may be shown as being in default, which could affect your ability to get credit for a while.
Plan or arrangement failure
If you don’t make all your monthly payments on time, or comply with all the terms of your IVA, your Debt Management plan or IVA could fail. If this happens, your creditors will be free to pursue you through the courts for repayment, which could include trying to repossess your home or force your bankruptcy.
This is why it’s so important tell your IVA company about any issues that prevent you from, or make it hard, to meet your monthly payment commitments. You may be able to reduce your Debt Management or IVA payments, if your creditors agree to this, so please talk to them as soon as any problems arise.