Debt management vs IVAs: which is right for me?

20 November 2008

If you are struggling with debt and looking to get your finances in order, there are a number of debt solutions that could help.

Here we take a close look at two very useful debt solutions: debt management plans and IVAs (Individual Voluntary Arrangements).

Debt management plan
Before you start on a debt management plan, you will speak to an expert debt adviser who will talk you through your financial situation in confidence. The debt adviser will want to find out a) how much you owe, and b) how much you can afford to pay each month after your essential living costs have been paid.

Once you have discussed this with your debt adviser, they will try to reach an agreement with your creditors. Usually, they will attempt to negotiate for:

• Lower monthly debt repayments (based on what you can afford each month, divided between each of your creditors),
• freezing or reducing interest, and/or
• stopping charges (e.g. for late payments).

If the debt management plan is approved by your creditors, you will start paying a fixed monthly amount to your debt adviser, who will divide it between your creditors based on how much you owe to each.

It is technically possible for you to do this yourself – but it is a complicated and time-consuming process. By arranging your debt management plan through an expert debt adviser, you will save time and benefit from the services of somebody with experience of speaking to creditors.

Best for: people with numerous debts who find they can no longer afford their full monthly payments.

IVA (Individual Voluntary Arrangement)
An IVA is intended for people with more serious debt problems – typically with over £15,000 of debt, and is generally considered to be a preferable alternative to bankruptcy. To enter into an IVA, you will be required to speak with an expert debt adviser, who will work together with an Insolvency Practitioner to put a case forward to your creditors.

An IVA involves making payments based on how much you can afford, and usually lasts for five years, after which your remaining debt will be written off.

IVA: step-by-step

1) If your debt adviser thinks an IVA is appropriate, they will work with you to draw up a proposal telling your creditors how much they would receive if the IVA goes ahead.

2) The proposal is then submitted to your creditors for approval. A Creditors’ Meeting will be arranged – although in reality, it’s rare for this to physically take place; voting is more often conducted in writing.

3) The Creditors’ Meeting invites your creditors to vote on whether to approve your IVA proposal. For the IVA to go ahead, those who vote in favour of the proposal must collectively own more than 75% of your total debts.

4) If approved, the IVA begins and you will pay a fixed amount each month, based on how much you can afford. This will usually take place over 5 years. Your creditors are legally required to stop charging interest and may no longer pursue any kind of legal action, unless the terms of the IVA are broken.

5) If you are a homeowner, you will be required to free up the majority of any equity in your home in the 4th year of your IVA, and this will also be divided between your creditors.

6) If you successfully keep up payments for 5 years, the IVA is complete and you are legally debt-free. However, the IVA will not disappear from your credit history for another year.

Best for: people with over £15,000 of debt who do are unable to repay those debts in full within a reasonable time period.

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