Is It Better to Do a Debt Management Plan or Individual Voluntary Arrangement?

If you are trying to resolve a debt problem, choosing whether to use a debt management plan or individual voluntary arrangement can be difficult. We consider which solution is the most suitable for you.

Two of the most common solutions for resolving personal debt problems are a debt management plan (DMP) and an individual voluntary arrangement (IVA).

Both of these solutions are commonly used to deal with debt but they both have different advantages and disadvantages. It can therefore often be confusing and difficult to decide which solution is the best to use.

There are however, a few simple questions which you can ask yourself that will help make your decision clearer.

Do you mind how long will it take to pay off your debt?

If you use a DMP none of your debt is written off. You are still obliged to pay everything back. In addition, your creditors can continue to add interest to your accounts.

As you will be paying a reduced amount each month, it could therefore take many years to become debt free using a debt management plan.

In contrast, an IVA lasts for a fixed period of time - normally five years. Your creditors must stop their interest charges and at the end of the IVA any debt which is still outstanding is written off.

For this reason if you want a guarantee that your debts will be gone in a fixed time, an IVA could be a better solution for you. However, if you feel that you want to try to pay all of your debt however long it takes you should consider a DMP.

Are you a home owner?

This is one of the key things that will affect your decision about whether to use a DMP or IVA

An IVA is a legally binding solution. Once your IVA is in place, your creditors are not allowed to take any further action against you to collect their debt.

This means that a property that you own will be legally protected from your creditors who could otherwise try to secure their debts against your home using charging orders.

Having said this, you also have to consider what will happen to any equity in your property. If you do an IVA you will have to agree to release some equity if possible to increase the amount you pay to your creditors.

If you carry out a debt management plan, you will not be required to release any equity from your equity. However, you run the risk of any equity being taken away if charging orders are issued against your property.

What type of debt do you have?

You can include most types of unsecured debt in a DMP. This includes, credit cards, store cards, catalogues, personal loans and bank overdrafts and business debts if you are a sole trader.

However, the one type of unsecured debt that you will normally not be able to include is tax debt. If you owe money to HM Revenue and Customs in the form of any kind of tax or VAT, a DMP may not be suitable for you.

In contrast, as well as all types of normal unsecured debts, you can include tax and VAT debt in an IVA.

For this reason here you owe money to HMRC you would normally consider an IVA as your preferred debt solution.

It is worth bearing in mind that secured debts such as mortgages, secured loans and car HP agreements cannot be included in either a DMP or an IVA.

Affect on your credit rating

Because a debt management plan is an informal non legally binding agreement and an individual voluntary arrangement is formal and legally binding, you may have thought that they would affect your credit rating in different ways.

In fact this is not true. Both solutions will severely damage your credit rating and your ability to take new credit in the future.

Once you are in a DMP it is likely that your creditors will issue default notices against you. These will remain on your credit file for six years during which time your credit rating will be poor.

After six years if your debts have been paid, your credit rating will start to repair.

However if any of your debts remain outstanding your credit rating will normally remain poor until these have been paid in full which could take longer than six years.

Once you start an IVA, this will be recorded on your credit file. The record will remain on your file for six years during which time your credit rating will be poor.

After six years the record will come off your file. Because you will then be debt free your credit rating will then start to repair. An IVA therefore gives you a fixed date from which time your credit rating will become better.

What type of job do you do?

Generally speaking your job will not be affected if you decide to start use either a debt management plan or individual voluntary arrangement.

However there are some jobs which may be affected if you become formally insolvent such as if you work for a bank, the police or another role where insolvency is seen as an issue.

Because it is a formal insolvency solution, if you start an IVA, you are formally classed as insolvent and your name will be added to the Insolvency Register. This record will remain until your IVA has finished.

As such, if you do a job where being formally insolvent is a problem, you may first have to agree with your employer that you can use an IVA. Or you may want to avoid this solution altogether.

A debt management plan is an informal agreement with your creditors. This means that if you do a DMP you are not classed as formally insolvent. There is no formal register of you being in a DMP and no one else will be told.

As such, if you are not allowed to become insolvent due to your job, a DMP may be the right solution for you.

Understand both solutions fully

Choosing whether to start a debt management plan or individual voluntary arrangement can be difficult. However if you understand how each solution will affect you the decision will start to become easier.

There is no right solution to choose and each will be more or less appropriate depending on your personal circumstances.

It is always sensible to talk to an expert debt advisor before making your decision. They will not judge you but simply be able to explain the solutions and what each would mean for you therefore making your decision easier.

What to do next

If you are struggling with debt, visit http://www.beatmydebt.com

Our vibrant debt forum gives free access to industry experts and others who have suffered with debt problems.

Useful guides, calculators and information are also available designed to help you understand how to manage and resolve debt problems.