IVAs vs Debt Management Programmes

To help you decide which of the debt solutions you prefer, here are the main pros and cons of each choice.

Debt Management Programmes tend to be most suitable when dealing with short term or temporary financial hardship, such as experienced with a temporary loss of income.

Types Of Debt Management Programme

There are essentially 3 types of Debt Management Programme and each is considered an 'informal' arrangement.

Being an informal arrangement means they cannot offer any debt forgiveness or legal protection, therefore, a Debt Management Programme will not protect your assets against creditor legal actions in the same way an IVA will.

A Debt Management Programme is not a legally binding arrangement either, and creditors are free to accept or decline the payment arrangement you put forward. As a result, they can continue to charge interest and apply charges to the outstanding debts if the so wish.

But Debt Management Programmes can provide a useful platform to temporarily reduce one's debt repayments to a more affordable level, whilst financial hardship is being experienced.

Read the Debt Management Programme FAQs here

Self-Help Debt Management Programmes

The first type is a 'Self Help' Debt Management Programme.

This is where a person contacts all their creditors under their own steam to explain they are experiencing financial problems, then agrees a new monthly repayment directly to each creditor.

Having direct contact with creditors as a result of financial hardship can be a very emotional and stressful experience, made all the more difficult if there are large numbers of creditors to deal with, so this strategy will not appeal to everyone.

However, setting up this type of informal arrangement for yourself will ensure your creditors receive 100% of the funds you have available to spend on your debts, which should ensure the repayment period of the arrangement is kept to an absolute minimum.

Charity Debt Management Programmes

The 2nd type of informal agreement is a 'Charity' provided Debt Management Programme.

With this type of programme the applicant has the support of the charity they've chosen to assist them with dealing with their debts.

These types of programmes are often preferred by people who have very little financial resource available to tackle their debts, because the charity helping them does not charge any fees for their service and support.

The charity will usually offer resources to assist with contacting and notifying the creditors of the financial hardship being experienced and the intention to reduce payments. They can sometimes assist with the distribution of payments to creditors too, although this is not always the case.

Commercial Debt Management Programmes

The 3rd type of informal agreement is a 'Commercial' Debt Management Programme.

Under this type of programme a person instructs a Debt Management Company (DMC) to act on their behalf.

They provide the DMC with their personal details, including a full list of creditors and an accurate financial statement and make monthly payments directly to the DMC.

The DMC in turn contacts the creditors on their client's behalf, informs them of the financial hardship being experienced by their client and distributes the payments on a pro rata basis.

As you can imagine, this service is not free and a management fee, usually somewhere between 15% to 20%, would normally deducted from the client's payment each month.

This obviously has the effect of reducing the amount of money the creditor will receive which, in turn, has the effect of lengthening the time it takes for the debts to be fully repaid.

It is also not unusual for the DMC to also charge a 'set-up' fee. The amount varies considerably from company to company but a fee equating to the first two monthly payments is not unusual.

This, unfortunately, has the effect of forcing two missed payments to creditors, putting the client into arrears and their accounts into default.

Each of theses types of debt management programme has a valid role as a debt solution but deciding which particular one is preferred will be up to the individual concerned.

Benefits of a Debt Management Programme

These are some of the benefits that can be received from a well administered Debt Management Programme.

  • Flexibility of repayments. You have control over what you payback each month.
  • Provides a platform to make contribution to your debt on a fair and balanced, pro rata basis.
  • Privacy. Your creditors can't force you to disclose any assets you may have.
  • Provides a constructive alternative to simply ignoring a debt problem by stimulating communication with creditors.
  • Temporary respite from creditors. Certainly whilst you are in the initial stages of your programme, your creditors will usually give you time to recover your financial position.

Downsides of a Debt Management Programme.

Because Debt Management Programmes are informal agreements there are other issues that should be considered too:

  • There must be a complete repayment of the debts, with no debt forgiveness.
  • The term of the programme will increase as necessary until all the debt is repaid.
  • The creditors are not legally obliged to freeze the interest on the debts.
  • The creditors are still free to take legal action if they wish.
  • The creditors are free to revise the programme at any stage and demand payment increases.
  • The applicant's credit file will be seriously effected when their accounts fall into default.

IVA Comparison

An alternative to the informal solutions above is a formal arrangement and it's called an IVA.

An IVA (or individual voluntary arrangement to give it its full name) is a solution that offers a person with debts over £10,000 a realistic alternative to the two informal arrangements above.

An IVA is know as a formal agreement because it is a legally binding, court approved arrangement, governed by the Insolvency Act of 1986.

Whilst this may initially sound pretty daunting, it really only means that once an IVA has been agreed by the necessary majority, creditors can't simply choose to make changes midway through the term. Whether they like it or not, they are bound by the agreement.

This, in turn, gives the applicant substantial legal protection from unhappy creditors who may otherwise have wanted to take legal action to enforce the debt.

IVA headlines

Here are some of the main points that an IVA provides :

  • An IVA acts as an alternative to bankruptcy and therefore protects the applicant's assets from creditors.
  • IVA repayments are set to an affordable level.
  • There is a fixed time period for the repayments, which are normally 5 years.
  • An IVA protects the applicant from legal actions.
  • Any debt not repaid during the IVA, the creditor are legally obliged to write off.
  • IVA's provide a suitable alternative for people whose professional activity might be restricted under a bankruptcy petition.

The purpose of the IVA is to bridge the gap between bankruptcy and solvency. It does this by offering the applicant legal protection from creditors, whilst allowing them opportunity to repay only what they can honestly and realistically afford.

It must be said that an IVA is not an easy option but, in the correct circumstances, it's a very powerful solution.

For a full breakdown of the Pros and Cons of an IVA click here.

To discuss the IVA option with one of our specialist IVA advisers call 0800 088 7502.

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If you would like further information on the pros and cons of an IVA and debt management, simply call 0800 088 7502

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