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IVA Or A Debt Management Plan

IVA Or A Debt Management Plan – which is most suitable for me?

Formality Of Agreement

Debt management is an informal agreement. You can return to paying your creditors at the original contractual rates at any time. Many people enter debt management to cover a spell of reduced income and return to paying creditors directly once they can afford to again.

IVA Debt Management Plan

IVA or Debt Management
A debt management plan can be a good short term solution – but an IVA will normally clear debts sooner.

An IVA is a formal agreement. By that we mean it is legally binding and setup using Government legislation under English and Welsh insolvency laws by an Insolvency Practitioner. Once in an IVA you can’t change your mind without risking bankruptcy, unless you are able to repay your debts by means of a lump sum.

Debt And Repayments Levels

For each; there is no absolute minimum level – it will depend on the provider; values stated here are typical.

For a debt management plan £1,500 of unsecured debt with at least 2 creditors, paying back £80 per month (or £20/week for weekly payers) is a typical usual minimum payment for debt management.

For an IVA, £5,000 is typically quoted as the minimum unsecured debt with at least 2 creditors (3 lines of credit), paying at least £70 per month. However, there is no absolute threshold that in itself rules out an IVA. Most IVA providers will be able to give examples of cases where fees have been reduced in order to pass an IVA for clients in special circumstances.

Amount Paid Back

Debt is repaid in full on a debt management plan.

A portion of the debt, up to 70% depending on personal circumstances, may be written off on an IVA. The most typical write off value is around 50%.

Interest And Charges

On debt management, it is requested of creditors that all interest and charges are stopped on debts. However creditors are not obliged to do this. Any individual creditor may choose to agree to such requests, or suspend or reduce such charges for a set period only – or not at all.

On an IVA, all interest and charges are stopped from the day the IVA is approved. This is set out in law.

Your Assets

Assets are a factor in an IVA

To be accepted for an IVA you must be insolvent. In most cases, this means your debts outweigh your assets, and you can’t afford to repay all your debts by the terms you’ve agreed to. By ‘assets’ we mean items you could use to raise money to pay creditors, for example a house, car, stocks and shares etc.

An IVA is intended to be a less severe alternative to bankruptcy. Instead of the courts potentially taking everything from you as in bankruptcy, you are given the opportunity to avoid this by paying back whatever you can over 5 years. For homeowners with equity in their property, this normally means remortgaging at some point during the IVA to raise funds to pay towards the IVA, see IVAs and Homeowners for more details about this.

You can’t enter into an IVA if, for example, your debts are £50,000 but you have £150,000 of equity in your property. You are not insolvent. Your creditors could bankrupt you and get all their money back.

Assets are not typically a factor in financial management

You do not have to be insolvent to be accepted on financial management, meaning your assets can be worth more than your debts. However, any creditor may choose to ask about an applicant’s assets and can reject any reduced repayment offer on these grounds.

Consequences Of Failure Of An IVA

The consequences of failure to maintain IVA payments is greater

On debt management, failure to maintain payments is easier to address, by renegotiating the terms of the agreement.

On an IVA, while variations in payments can be renegotiated, this is less straightforward than on financial management.

Also, if you fail to complete an IVA at, say, the half way point (30 months), then it is not the case that half the debts are repaid and you can negotiate from that position. Debt is only written off upon the successful conclusion of the IVA. Furthermore, creditors take the position that the initial IVA payments go towards their costs incurred in setting up the IVA (the IVA company’s Nominee fee) and not towards clearing the debts.

In short, if an IVA fails within the first year or so, you are likely to find yourself in a worse position than before. This is why an IVA is a serious undertaking which must have a high degree in confidence of success from the offset.

IVA Eligibility Test