What’s the Difference Between a Debt Management Plan vs IVA?

Debt Management Plan or IVA – what’s right? I’ve been asked the differences between these debt solutions and what’s better countless times. 

It’s usually straightforward to work out which one you’re more suited for, but it’s always best to get confirmation from free debt advisors. I reveal exactly how to do this below.

Is a Debt Management Plan the same as an IVA?

No, a Debt Management Plan and an IVA are two different debt solutions. The two have some similarities, but they have key differences and aren’t the same debt solution. 

Do you have to pay?

There are ways to have debt written off in the UK.

If you genuinely can’t afford your debt repayments then looking into whether you could have your payments lowered or written off might be just what you need. 

If you want to find out whether you qualify for having debt written off or payments lowered then fill out the short form below.

What is better, IVA or Debt Management Plan?

Neither the IVA or the DMP is better than the other. An IVA and DMP both have benefits and limitations. The best debt solution can only be identified based on individual circumstances and preferences.

You can get free help working out which debt solution is most suitable and advantageous to you by speaking with a UK debt charity. This is the better option than asking online forums where people don’t know your circumstances and aren’t qualified to give you a solid answer. 

Yet, the question keeps cropping up online:

Source: https://forums.moneysavingexpert.com/search?query=debt%20management%20plan%20or%20iva&scope=site&Search=debt%20management%20plan%20or%20iva&source=community 

Organisations like National Debtline and StepChange will provide free and personalised debt advice. They can even help you set up a Debt Management Plan or IVA (via a partner) if this is judged to be your best option. 

But it’s still good to have an understanding of how these debt solutions work and differ. You might decide that one isn’t right for you from the outset…

How does a Debt Management Plan work?

A Debt Management Plan is an informal debt solution, which means it isn’t legally binding and can be cancelled by either party at any time. It’s used to repay non-priority debts, which are debts like personal loans, credit cards and store cards. 

Once a Debt Management Plan has been agreed with your applicable creditors, you make a single monthly payment into the DMP. This monthly payment is then split between creditors based on how much debt you owe each of them. 

For example, if you have two debts and owed them the exact same amount (unlikely but an easy example) then they would both get 50% of your monthly payment. 

The monthly payment is proposed to the creditors based on what you can afford to repay. This is what makes a DMP an affordable way to pay back multiple debts. However, you must propose a reasonable monthly repayment which shows you’re doing your best to repay as much as possible while maintaining essential living costs, such as rent, bills and groceries. 

It’s possible and quite common to get interest and other charges frozen while using a DMP, but creditors aren’t obligated to do this. If they do agree to freeze interest, you might end up repaying much quicker. 

Can you lower your repayments?

If you’re struggling to pay back your debt, then you might qualify for a debt solution.

Some solutions lower your monthly payments while others write off a portion of your debt. 

To find out whether they could work in your situation, hit the button below.

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How do you set up a Debt Management Plan?

You have three options to negotiate and set up a Debt Management Plan with creditors:

1. Negotiate with them directly yourself, known as a DIY DMP
2. Get a debt charity to negotiate with creditors for free on your behalf 
3. Use a debt management company to negotiate with creditors on your behalf

Creditors aren’t obligated to agree to the DMP but they are encouraged to listen to proposals and the reason for the DMP offer. 

Most people use a debt charity to get a DMP because they don’t feel confident negotiating with their creditors directly, and because debt management companies charge fees. 

You might see some debt management companies suggest they will secure you a better deal, but there isn’t any widespread data to suggest this is always true. 

If you did decide to use a debt management company, always research the company and never feel pressured to enter into the DMP. And make sure you’ve been assessed for other debt solutions first. 

Who is suitable for a DMP?

The eligibility criteria to use a DMP is minimal due to it being an informal debt solution. 

You can typically use a DMP as long as your repayment to each creditor is at least £5 per month, although this isn’t set in stone. You can only include non-priority debts, however. 

With a DMP it’s more of a case of whether this is the right debt solution for you, rather than if you can use it or not. 

What are the advantages of a Debt Management Plan?

The general benefits of using a Debt Management Plan are:

1. They can be free to set up with many charities offering to help.

2. You repay with one monthly payment, which has been calculated as affordable based on your situation.

3. You may be able to have your interest frozen during the course of the DMP, which helps you pay the debts off faster.

4. Merging debt repayments into one monthly repayment makes it easier to budget, which may prevent further arrears.

What are the disadvantages of a Debt Management Plan?

The main drawbacks of using a Debt Management Plan are:

1. It’s an informal debt solution, so creditors can withdraw from the agreement at any time and ask for full repayment or take further (legal) action to recover the money.

2. A DMP can only be used to repay non-priority debts, so you won’t be able to use it on all types of debt.

3. Your credit score will be decreased due to partial repayments. Although, this could still be better than failing to make any repayments and getting into further arrears.

How does an Individual Voluntary Arrangement work?

An Individual Voluntary Arrangement (IVA) is a legally binding debt solution, meaning once it is agreed, you cannot end the agreement without serious repercussions. But this also means your creditors cannot back out at a later date either. 

An IVA can only be used to repay unsecured debts, such as personal loans, credit cards and store cards. Once an IVA has been agreed upon with applicable creditors, you make a single monthly repayment into the IVA based on what’s affordable, which gets distributed to the creditors proportional to the debt owed to each of them.

Monthly repayments usually last for five years. During this time, you’ll be placed under spending restrictions and need to report to your IVA supervisor, also called an insolvency practitioner. Once 60 repayments have been made, you will either need to:

1. Release equity from a property to make a lump sum payment
2. Ask someone else to make a lump sum payment into the IVA on your behalf
3. Extend repayments for another year

Any of the above will end the IVA, which then writes off any remaining debt still to pay. 

How do you set up an IVA?

Individual Voluntary Arrangements can only be negotiated and set up by accredited insolvency practitioners. 

You must receive professional debt advice before trying to get an IVA, which is available from debt charities. These charities can even help you negotiate an IVA with suitable creditors via trusted commercial debt management companies. 

Alternatively, you can go straight to the debt management company. There are fees for their services and the ongoing management of the IVA. But the fees are usually taken from your monthly payment rather than an extra expense. 

When they make your IVA proposal to creditors, it must include all your debts so you show that you treat all applicable creditors equally. 

These creditors then vote on whether to accept or reject the IVA proposal. If it’s accepted, all creditors are included in the IVA – even the ones that voted against it.

Who is suitable for an IVA?

To use an IVA you must have at least two applicable creditors. However, an IVA is usually only beneficial if you have significant debt that you won’t be able to pay back over a reasonable time period. 

You will need to have regular income to get your IVA accepted, such as employment or pension payments. 

Your debt adviser will assess your suitability for an IVA against other debt solutions to ensure you’re making the smartest move. 

What are the advantages of an IVA?

The main benefits of using an IVA are:

1. You are committed to making affordable repayments based on your financial circumstances. 

2. Any remaining debt when the IVA ends is written off.

3. Homeowners can keep their home, but they may need to release equity to end the IVA if possible. 

4. Because the IVA is legally binding, your creditors cannot change their minds. 

What are the disadvantages of an IVA?

The main disadvantages of using an IVA are:

1. Using an IVA damages your credit rating.

2. You’ll be placed under spending restrictions and must report to your IVA supervisor.

3. You will have to pay ongoing fees, although these are taken from your monthly payment.

4. You might have to release equity from your home to end the IVA. And you’ll have to pay in any windfall into the IVA as well. 

How are IVAs and DMPs similar?

Although these debt solutions aren’t the same, there are some similarities between an IVA and DMP. 

Both debt solutions allow you to make a single monthly repayment based on your financial circumstances, which makes the payment affordable to you. These monthly payments are then proportionally split between creditors. 

And both solutions are often used to repay the same types of debts, such as unsecured loans and credit cards. 

What is the difference between a Debt Management Plan and IVA?

Debt Management Plans and IVAs have several differences. The main differences between these debts solutions are:

• An IVA is legally binding, whereas a DMP is not so creditors can change their minds

• A DMP can be set up independently and for free, whereas an IVA must be set up by paying an insolvency practitioner 

• IVAs are mostly used by people working jobs, whereas this isn’t always the case with a DMP

• An IVA may require you to release equity from a property or make a lump sum payment, but this isn’t part of the DMP repayment process

• An IVA can write off some of your debt, whereas a DMP doesn’t but can get your interest frozen.

Debt Management Plan Vs IVA (Quick summary)

A Debt Management Plan and IVA are two different debt solutions that allow you to repay multiple applicable creditors via affordable monthly repayments. 

But a DMP is an informal solution and an IVA is legally binding for all parties. The repayment process is usually longer and more complicated in an IVA. 

The only way to know which one is better for you is to get personalised debt advice from a debt charity like StepChange. 

“It will only get worse” 😩

It’s cliché to say, but with debt it’s true; the longer you leave it, the worse the problem gets. 

There are straightforward and effective ways to deal with debt, but you have to know your options. 

Fill out the short form to find out about the debt solutions that could reduce your monthly payments or even write off some of your debt.

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Explore even more options!

But a DMP and IVA aren’t your only options. 

You may be better off using a Debt Relief Order or even petitioning for bankruptcy. I discuss all your debt solution possibilities in my How to Beat Debt guide. Check this out and remember that free help is widely available.