Here at Debt Advice You Can Trust we get asked a lot of questions about the differences between debt solutions. Is a debt management plan right for you? What about an individual voluntary arrangement (IVA)? Which is best?
When choosing a debt solution the most important thing to do is look at your own individual circumstances, this will often decide which solution suits you best. IVAs and debt management plans are two different ways of managing a debt problem. If you’ve got a debt problem, the first thing to do is put together an income and expenditure budget.
Putting together a budget
Start with your income, you need to make a list of all the money that you have coming in each month. This can be your wages, benefits, pensions, rent from a lodger or self-employed earnings. You need to make sure you know exactly how much money you have at your disposal each month. If you are self-employed you should deduct tax and national insurance contributions.
Once you’ve got the exact amount of money you have each month, you need to list all the bills you need to pay. Our advisors can help you with this, but it’s important to list every bill you have to pay each month. A quick look below may help:
- Secured loans
- Council Tax
- Phones and internet
- TV licence and TV packages
- Car payments
- Bus fares
- Medical/Dental fees
- Court fines
- Childcare fees
Once you’ve ticked all of these and made notes of how much you pay monthly to each, you should next make notes about other things you need to buy each month, such as:
- Travel costs (including parking)
- Entertainment (days out, meals out)
- Hair cuts
It’s important to be realistic about how much you spend, especially when you’re looking at a debt solution like an IVA or a debt management plan. These are longer term debt solutions and your budget will be very important when you sign up.
Once you’ve added your income up and taken away your expenditure you’ll have the amount of money left over each month to pay towards your unsecured debts. You should always pay priority bills before unsecured debts.
What is a Priority bill?
A priority debt is something that needs to be paid so that you can live. We all need a roof over our heads (rent/mortgage), we all need to be able to have water and heat (Gas/Electric/Water). We all need food and clothing and we all need some travel money to get too and from work, or to visit relatives or go shopping.
We also need to make sure that we pay bills that have to be paid, like council tax and the TV licence, if we didn’t pay these they can lead to court action.
What is an unsecured debt?
An unsecured debt is debt doesn’t have any collateral attached to it. For example, a mortgage is connected to a property, so this is a secured debt. A credit card isn’t attached to anything, neither are (most) payday loans or personal loans.
If you take out a logbook loan on your car, this can be a secured debt as the log book loan company transfer ownership of your car as collateral. A secured loan is loan usually secured against your property. If you’re not sure if a loan is secured or not don’t worry. When you contact us we’ll look into it for you.
Money left over for unsecured debts
Finally the last list you need to make is the list of your credit commitments, you should list each creditor, the outstanding balance and how much the minimum payment is each month. Your list may include some of the following:
- Personal loans
- Credit cards (list as many as you have)
- Car loans
- Payday loans
- Bank overdrafts (how much do they cost you each month if fees)
- Catalogue debts
- Store card debts
- Doorstep lender debts
- Any other unsecured debts
Once you’ve listed these debts, you need to look to see how much money is left after your priority bills are paid, this is how much you have left to pay your unsecured credit commitments. In most cases where people have a debt problem they’re often unable to pay much towards outstanding credit commitments at all.
So how do I choose between a debt management plan and an IVA?
Before we look at how to choose between the two debt solutions, let’s look in a little bit more detail about the differences between an IVA and a debt management plan…
Individual Voluntary Arrangements and how they work
An IVA is a formal debt solution, it’s a legal agreement between you and your creditors and it’s overseen by a licenced Insolvency Practitioner who acts as Supervisor of your IVA. IVAs usually last between five and six years and to have an IVA approved your creditors need to agree to the legal proposal.
An IVA is a popular alternative to declaring bankruptcy, an IVA often allows you to retain certain assets such as a property or a vehicle(s). An IVA lets you come to an agreement with creditors while still keeping some assets.
No longer chased by creditors
Once an IVA is approved your creditors are no longer allowed to contact you or take any further legal action against you. This can be a real relief for people who are being chased by creditors.
The best way to get an IVA is to contact us and we’ll look at your situation in detail. We work with specialist IVA providers and leading Insolvency Practitioners. There are no upfront fees and the only fees you’ll need to pay are taken from payments made into the IVA once it’s approved with your creditors (all IVA companies and the debt charities operate the same way).
In the first instance a legal IVA document will be drafted by the licenced Insolvency Practitioner who will present the document to your creditors. Your creditors will then vote on whether to accept your IVA or not. 75% of creditors who vote must vote to accept for the document to go through.
IVA payment breaks
Once the IVA is up and running you’ll make the agreed payment each month to the Insolvency Practitioner who will distribute the money to your creditors (minus IVA running fees agreed with your creditors). You’ll usually have a yearly review to check your budget is sustainable and you can contact the Insolvency Practitioner at any time if you are struggling.
It is possible to have payment breaks in IVAs with the approval of your Insolvency Practitioner and your creditors. After all, 5 or 6 years is a long time, so most IVA proposal have some clause for suspension of payments in the case of an emergency.
Percentage of your debt will be written off
If you own a property most IVA documents ask that you get a fresh valuation of the property in the 4th year of the IVA. If there is significant equity in the property you may be asked to attempt to release some of this equity for the benefit of your creditors. This is usually done through some form of re-mortgage. You will not be asked to sell your property or move house. If there is equity available and you can’t release it, the IVA term may be extended by 12 months.
In most cases creditors prefer IVAs to bankruptcy, in an IVA you will pay a percentage of the money you owe back to creditors, but creditors will also write some of your debts off. This is all agreed in the IVA proposal so you know where you stand.
IVAs have grown in popularity over the last 20 years, the benefits include:
- Fixed time frame to be debt free
- Keep your property
- Fixed payments
- Guarantee of no more creditor action or contact from creditors
- Work with an Insolvency Practitioner
- No upfront fees
- Percentage of your debts will be written off
If you want to learn more about how IVAs work please contact Debt Advice You Can Trust.
How does a debt management plan work?
A debt management plan or DMP is another way to repay your creditors over a reasonable period of time. Entering a debt management plan means that you’re saying to your creditors that you do want to repay the money owed, but you can’t currently afford the monthly contractual payment the creditors are asking for.
In exchange for entering the debt management plan you agree to pay each creditor what you can reasonably afford to pay. This means you have broken your agreement with the creditor, but it also means that you’re facing up to a debt problem and that you’re not running away from the debts.
Once you break your contractual agreement
Once you stop paying the minimum payment to creditors each month, they may start to add extra interest and charges to your debts, they will also issue you with a default notice that will be listed on your creditor file for six years. However, creditors are very receptive to debt management plans. Here are the reasons why:
- Creditors know that a lower monthly payment each month is better than no payments
- Creditors will get to see your income and expenditure budget
- Creditors know that they’re all being treated equally
- Creditors know that you are maintaining contact with them
Suspending interest and charges
As a debt management plan isn’t a formal legal arrangement like an individual voluntary arrangement (IVA) and it might take a couple of months for creditors to settle down. We can’t guarantee that creditors will suspend interest and charges (nobody can, not even the debt charities or government funded bodies – it’s entirely up to the creditor themselves). Most creditors will acknowledge a debt management plan (DMP) and suspend chasing the debt while the debt management payments are being made.
A debt management plan is usually a good solution when the debts will be all paid off over five to seven years. Other advantages of a debt management plan include;
- You can vary payments easily as your circumstances change, paying more or less
- It’s not a legal form of insolvency like an IVA or bankruptcy
- You don’t need to declare any assets
If a debt management plan or an IVA sound like a good solution to your debt problems please get in contact with Debt Advice You Can Trust. You can also call Debt Advice You Can Trust on 0800 231 5001 we’ll be happy to help start your debt free journey.