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Debt Management or an IVA

Choosing Between Debt Management and an IVA

Deciding what solution to go for is a serious business for the insolvent debtor. The usual choices are Bankruptcy, often described as the last resort option, an Individual Voluntary Arrangement (IVA), seen as a relatively new solution although IVAs have actually been about for over twenty five years now and a Debt Management Plan.

These are the three principal options available for addressing personal financial difficulties up to the point where the debtor is personally insolvent. There are other options available such as Debt Consolidation, a Debt Relief Order, an Administration Order, re-mortgaging or selling an asset such as a house and using the released equity or sale proceeds to settle debts with creditors. It may even be that the debtor’s family or friends may be able to advance funds to help him or her to address their debts but for most people this would not be an option. If one did have rich relatives or friends they would not necessarily be volunteering to provide financial assistance, even if the debtor was able and willing to swallow his or her pride and disclose their financial predicament.

Man in a financial predicament

Some of the other options summarized above can be ruled out right away. For example, if you do not own a property then remortgage or sale does not arise. Even if you have a property there may be no equity in it or the equity may be tiny or it may be impossible to find a lender who is willing to finance a remortgage at anything better than exorbitant interest rates. Another option that may not be available is a Debt Relief Order. If your debts are over £15,000 or if you have assets valued at more than £300 or if your disposable income is greater than £50 per month, then you do not qualify for a Debt Relief Order, sometimes described as the ‘poor person’s bankruptcy’. Debt Consolidation is frequently seen as a solution that just ‘pushes the can down the road’. While monthly payments may be less than the debtor’s current cumulative total monthly payments, the repayment term may be much longer than the term of any of the current individual debts.  

In deciding which option to pursue, the debtor should seek advice from organizations such as the CCCS, CAB or Payplan or from any of a large number of commercial providers of insolvency services. More than one such provider should be approached to ensure that not only is the best advice obtained but the full range of solutions is adequately explored and researched before a decision is made.

Let us consider the three main options, assuming none of the others are suitable. For many people, the stigma of bankruptcy is still a major impediment to going down that route and if ruled out the choice is then between an IVA and a Debt Management Plan. Key factors to be considered are affordability, duration, sustainability, acceptability to creditors, restoring credit worthiness and sufficient light at the end of the tunnel to offer some hope of being debt free within a reasonable period of time.

For example, suppose that the debts amount to £30,000 and the debtor’s disposable income is just £275 per month. In an IVA lasting five years, the normal duration for most IVAs, the debtor would contribute 60 monthly payments of £275, a total of £16,500 and this would cover the costs of the IVA and the dividend to creditors. The remaining £13,500 of debt would be written off. In one more year the debtor’s credit file would begin to be repaired. If the same debtor opted for a Debt Management Plan instead, the full amount of the debt would have to be repaid and at £275 per month, that would take at least nine years and two months, assuming all creditors agreed to freeze interests, penalties and other charges, which in a Debt Management Plan cannot be taken for granted, given the lack of legislation governing the process. While the full debt is ultimately repaid, the restoration of the credit file would be at least ten years away.

A Debt Management Plan then is not nearly as attractive for the debtor as an IVA and it does not have the full weight of the law behind it. Certainly, if the projected duration of the Debt Management Plan is five years or more, then the debtor should fully explore and consider the IVA option. A reputable Insolvency Practitioner will of course outline all available solutions and options for the insolvent debtor and provide the pros and cons of each solution. It is best to shop around as no provider has a monopoly of wisdom or experience.

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MoneyHelper

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