The Merits of a DMP
Debtors in the UK who are encountering financial difficulties and who may be insolvent usually opt for one of the three principal solutions of Bankruptcy, an Individual Voluntary Arrangement (IVA) or a Debt Management Plan (DMP).
How do creditors rate these options?
There is no rational or logical reason why creditors should prefer their insolvent clients to go bankrupt, since they are likely to receive little or no return on the monies loaned. From the point of view of creditors, bankruptcy is the worst outcome. The next least favoured outcome is an IVA since the amount of the debt that will be repaid is likely to be between 25% and 50% – although for a small number of cases it can above or below that range. The most favoured option for creditors is a debt management plan, primarily because there is an expectation on the part of creditors that debts will be repaid in full, albeit over a longer time than was originally contracted for. In addition, creditors do not have to freeze interest and penalties in a DMP as they have to do by law in an IVA. While there no official statistics, the number of DMPs are estimated to be vastly greater than the combined numbers of IVAs & Bankruptcies.
Establishing Solvency
There are two tests which can help you to determine if you are solvent or not. These tests can be applied to companies as well as individuals. The ‘balance sheet test’ asks the question: ‘do your assets exceed your liabilities?’ The cash flow test asks the question: ‘are you able to pay your debts as they fall due?’If you can answer ‘yes’ to both questions, then you are solvent. If you answer ‘no’ to both questions, then you are insolvent. If your answer is ‘yes’ to the first question and ‘no’ to the second question then you may be solvent – it could be said that you are solvent according to the balance sheet test. If you need help to establish your solvency or otherwise, then any reputable firm offering insolvency services can quickly determine the answer for you. You may seek to enter into a DMP whether you are insolvent or not but you must be insolvent if you want to enter into an IVA.
Privacy & Confidentiality
When you enter a DMP, certain parties will be aware of it immediately and of these, the principal group is creditors. In fact, once you enter a DMP, creditors may enter defaults on your credit files, if they have not done so already, since you have broken the terms of your repayments as originally agreed. Who else needs to know about your DMP? Apart from the third party who is assisting you in your DMP – there is no need for anybody else to know. And there is no reason why your employer, your neighbours, your family or your friends should know about it. It may be impossible to keep your DMP from the notice of your spouse or partner since your plan will have to contain an income and expenditure statement regarding your family and you may have joint debts with your spouse or partner.
DMP or IVA – Which is the Best Option?
While one should choose the most suitable solution your personal circumstances may on occasion prevent a debtor from initially choosing the ‘best’ option. For example, you may work in a profession where entering an IVA may lead to your being dismissed from your job or may lead to the curtailment of opportunities for promotion or advancement. While such sanctions are usually more severe if you were to opt for bankruptcy, a lot may depend on your employer’s attitude to IVAs, particularly if you are in a position of trust, financial or otherwise or if your promotion would place you in a position of trust. Apart from the policy, practice and attitude of your employer, you also have to consider the attitude of any recognized professional body (RPB), of which you may be a member and the possibility that you could lose such membership if you were to become bankrupt or enter an IVA. You may find that disclosing such financial status to your RPB is mandatory, whereas entering a DMP may not carry any such requirements.
Is Debt Management an Option in Ireland?
Yes. Currently Ireland does not have any processes similar to an IVA or bankruptcy in the UK and the only similar albeit unregulated process there is a Debt Management Plan. However, the final report on personal insolvency published last year in Ireland by the Law Reform Commission is likely to lead to new personal insolvency legislation being enacted in 2011 by the new Irish government. Some of the proposals likely to be enacted are: to establish a new system of personal insolvency regulations allowing for a statutory non-court-based debt settlement system; to establish a central Debt Enforcement Office; to regulate debt collection agencies.