Why is an IVA better than a debt management plan?

If you find yourself having to consider debt management options then the terms “Individual Voluntary Arrangement” (“IVA”) and “Debt Management Plan” (“DMP”) are likely to become familiar terms, regardless of who you choose to consult about it.

The crucial question is – what’s the difference and why could an IVA prove to be a better option than a debt management plan?  In this article we consider both options a little more closely, before going on to look at the benefits of an IVA as a debt management solution.

About debt management plans …

A debt management plan is basically an informal agreement made between both yourself and your creditors in respect of “non-priority” debts.  Most individuals who find themselves considering a DMP tend to enlist the services of a licensed debt management company or consultant and there are certainly many benefits for entering into one – not least of all because it means you can make just one monthly payment and then have it distributed to all your creditors, without having to do it all individually (which, ironically, is why you might have found yourself facing financial difficulty in the first place).  Unfortunately, it remains a well-established fact that the vast majority of debt arises not necessarily through lack of willingness to pay it but more specifically through poor money management, lack of time, day-to-day banking arrangements and so on.  In all honesty, the list goes on and it’s not difficult to see how so many individuals find themselves having to juggle regular financial commitments – sometimes without any success.

The important thing to remember, however, is that DMP’s can’t be used to deal with what are classified as “priority debts”, i.e. mortgage or rent repayments, council tax arrears, Court fines, child maintenance, income tax and so on.

Of course, it can be quite confusing to determine what might be considered as a ‘priority debt’ versus that of a ‘non-priority’ debt so if you’re in any doubt whatsoever then it’s important to take professional advice – and sooner, rather than later; particularly given that any type of debt is quickly capable of incurring further costs and charges.

About IVA’s …

Whilst many people struggling with financial matters tend to think that IVA’s are much more ‘serious’ by their very nature, there are certainly many benefits to them – even over and above those of a standard debt management plan.  Here’s why:

  • Unlike a debt management plan, an IVA is legally binding between both yourself and your creditors. This means that, once it’s been approved by the Court, your creditors can’t take any further action against you (nor can they make any further contact in terms of debt recovery chasing – letters, phone calls and so on).  For many, this fact alone provides immediate stress relief and a definite sense of ‘being back in control’.
  • Once agreed and finalized, creditors are then unable to add any additional interest to the outstanding amount or apply further late payment charges etc. Again, this also adds to the overall sense of being in control of the debt and means that you’re perfectly clear on the amount owed.  Put simply, repayments can be made knowing that they’re going towards the actual debt itself and not any other additional interest or admin charges.
  • If you’re a home owner then an IVA provides vital protection since creditors won’t be able to enforce a sale of your property in order to release any equity in it. This is often considered to be a massive bonus for most debtors; particularly those who are already well into their mortgage term (or, equally so, those just getting onto the property ladder).
  • For certain individuals, an IVA can also provide invaluable protection against their employment status since certain job roles specifically prohibit bankruptcy and can even result in dismissal/termination of their contract. These roles typically include anyone working within the banking sector, police service and armed forces.
  • Another major advantage is that, whilst your details will appear on the Insolvency Register, your agreement is otherwise private as between you and your creditors (add to this the fact that not many people tend to check the Register without good reason!)

Unlike bankruptcy (which has to be made public and advertised in the London Gazette) your name won’t be published in any newspapers nor will anyone be told about your IVA – for example, (and perhaps most importantly) your employers.  In this sense, the IVA is actually much more beneficial than having a County Court Judgment registered against you as any creditor can then apply for an Attachment of Earnings Order (which means that deductions are taken directly from your salary and ultimately, of course, your financial position is made known to your employers).

  • If you’re the Director of a limited company then you won’t be disqualified as a Director by entering into an IVA. You may even be able to obtain credit; particularly if this done under your limited company’s name.
  • If you’ve already been issued with a Statutory Demand you can still enter into an IVA by applying to the Court for an interim order (although it’s best to obtain legal advice on the best way to do this).

This ultimately means that all legal action is suspended until such time as a creditors meeting is held and a plan of action is agreed going forward.

  • When assessing the terms of an IVA, careful consideration will also be given as to what you actually afford to repay once all your ‘priority debts’ have been taken into account. This means that you shouldn’t be faced with unaffordable repayments or find yourself in a worse financial position than you were before; nor will you have to find extra funds to cover any shortfall.  The amount you agree is the amount you pay.
  • All IVA’s (however they’re negotiated and assessed) are subject to a fixed timeframe (usually no more than five years). This means that if you haven’t repaid all your debts once it ends then the remaining balance will be written off without any repercussions from your existing creditors.  Imagine being completely free debt in just five years’ time!
  • Once your IVA has been finalized you’ll be issued with a ‘Certificate of Completion’ by an insolvency practitioner. This can then be produced to future lenders as proof that your debts have been satisfied in full (and that you entered into an arrangement to have them paid off).

By way of conclusion, then, there are certainly many advantages to be enjoyed by entering into an IVA (even Scottish IVA’s) and they certainly shouldn’t be dismissed as a good way of getting yourself back on track.