Debt Management Plan Vs IVA
Are Individual Voluntary Arrangements the Best Debt Solution?
Jan 27, 2009
With unsecured debt now standing at 0.2 trillion pounds, finding the best debt solution has never been more important. Unpaid credit card debt and unsecured loans are at a record high. Does an Individual Voluntary Arrangement (IVA) or a Debt Management Plan (DMP) provide the best best debt solution?
What is an IVA?
Unlike a Debt Management Plan, an Individual Voluntary Arrangement is a legally binding agreement between a debtor and his creditors. Provided 75% of creditors (in terms of value) agree to an IVA it can result in up to 75% of personal debt being written-off. Monthly payments last for 60 months.
What is a Debt Management Plan?
This is a means of putting all unsecured debts under one roof. The debtor makes a single payment to an intermediary who disseminates this to creditors on a pro rata basis. It helps prevent creditor harassment as they receive a contribution towards any unpaid credit card debt. The debt remains until it is completely paid off, although any interest and charges may be frozen.
Debt Management Plan Costs Vs Individual Voluntary Arrangement Costs
DMP's: Most companies charge debtors 15% of cumulative contributions. It would cost someone upwards of £35,000 to pay off £30,000 of unpaid credit card debt. It provides some protection from creditor harassment, but it isn't legally binding and there is no debt write-off.
IVA's: The administrative are largely determined by Insolvency Practitioner fees, which can be up to £6,000. The cost is greater, but it is possible to write off up to 75% of personal debt. Assuming someone was able to write off 50% of debt, they would pay back £21,000 over 5 years - a savings of £14,000.
Modest or Serious Personal Debt?
The classification of serious debt has been set at £15,000. Due to the cost of hiring an Insolvency Practitioner, an Individual Voluntary Arrangement should only be considered by those with serious debt. A Debt Management Plan is the best debt solution for modest sums of money.
Preventing Creditor Harassment
Although only a voluntary agreement, most creditors won't pursue a debtor who has entered a Debt Management Plan as they are receiving payment. An IVA is legally binding and provides court protection from creditors provided that monthly payments are maintained for the duration.
Failing to Keep-Up with Monthly Payments
IVA's: Those who have entered an IVA will normally be declared bankrupt if they fall more than 2 months behind with payments. However, the Insolvency Practitioner is able to hold a meeting of creditors to see if there is sufficient support to arrange a modification.
DMP's: Failing to keep-up with repayments means that creditor and collection agency contact will start again. Those who have assets of value, such as an expensive car or house with a reasonable level of equity, may be declared bankrupt by their creditors in order to recover their money.
Use a Debt Management Plan to clear smaller debts and an Individual Voluntary Arrangement or IVA for more serious debts. Those who aren't home owners may wish to consider declaring personal bankruptcy, but it is important to receive debt counselling before deciding what is the best debt solution.
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