IVA vs DMP: Which debt solution is right for you?

Deciding to deal with your debt can make it feel like a weight has been lifted, but knowing how to navigate the debt repayment process can be easier said than done. Depending on your circumstances, you might qualify for a number of solutions.

IVAs and DMPs are two of the most popular solutions available to individuals struggling with unaffordable debt. However, while they share some similarities, there are also some key differences you should be aware of.

What is an IVA?

An Individual Voluntary Arrangement (IVA) is a legally binding agreement between you and your creditors to make monthly payments towards your unsecured debt over a set period. Your monthly payments will be based on affordability, allowing you to repay your debt alongside your essential costs.

Most IVAS last five years but your agreement can be extended to six years if you miss payments and need another 12 months to make up for the extra money owed.

An IVA must be managed by a licensed Insolvency Practitioner (IP), who is a financial expert authorised to represent you and act on your behalf during your IVA.

Once you’ve made your final monthly payment, all the included debts will be written off and you’ll be free to make a fresh financial start. The IVA will usually remain on your credit file for another year (six years in total), during which time you’ll struggle to access further credit.

How does an IVA work?

The IVA process can usually be summarised into a few steps. We’ve broken it down below:

Meet with IP

The first step required in an IVA process is to meet with an IP. They will review your financial situation and let you know if they think an IVA is the right solution for you.

If they believe another solution would be better suited, they will let you know at this stage to prevent you from entering into an IVA when it perhaps wouldn’t be right for you.

Create an IVA proposal

Once it’s been determined that an IVA is right for you, your IP will start creating your proposal. This is a document designed to show your creditors how much you owe, what you can afford to pay, and how you plan to repay it.

The IVA proposal will then be sent to your creditors for approval.

Wait for a decision

From the date your creditors receive your IVA proposal, they will have 28 days to vote for or against the terms proposed. Only 75% of your creditors by debt level are required to agree with your proposal for it to go ahead. This means that, even if 25% of your creditors disagree, your IVA can still be approved.

This process is called a ‘meeting of creditors’ or ‘creditors meeting’, which might make it sound like your creditors meet in person to discuss your debt, but it usually happens virtually with votes cast at different times.

Make your first payment

Once your IVA proposal has been approved by a majority of your creditors by debt value, your IVA will officially begin and you’ll be legally protected. This means your creditors can’t contact you, add interest or charges, or take legal action against you.

This is also when you’ll be informed of your first payment date, which will typically be within 30 days of this date.

What is a DMP?

A Debt Management Plan (DMP) is an informal debt solution where you make monthly payments towards your outstanding balance until your total debt has been repaid.

DMPs require you to pay back 100% of your debt and will last for as long as it takes for you to do this (typically between five to 10 years). The funds are usually sent to a DMP provider, who will then distribute the money among your creditors.

Because DMPs are informal, neither you nor your creditors are legally bound to the terms and conditions of the arrangement and are free to exit the agreement at any point.

DMPs also stay on your credit file for up to six years, making it difficult to qualify for a loan or mortgage in this time.

How does a DMP work?

The DMP process also tends to follow a similar process regardless of provider. We’ve outlined the steps you can expect below:

Find a DMP provider

The first step in the DMP process is finding a provider. They will assess your income, expenses, and debts to determine how much you can realistically afford to repay towards your debt going forward.

It is possible to complete a DMP without the help of a third party, but you’ll have to contact each creditor and manage your payments yourself.

Create a DMP proposal

Once you have a clearer picture of your finances or you have consulted a financial expert, you can start building a DMP proposal.

This involves looking at your payslips and bank statements to determine where your money goes and how much you can realistically afford to contribute to debt repayment each month.

Contact your creditors

Once your DMP proposal is complete, it will be sent to your creditors who will review all the information and decide whether or not they agree to the terms proposed. They can also choose whether to freeze interest and charges, but this isn’t a legal requirement.

If, for whatever reason, your proposal is rejected by your creditors, you’re still free to apply for other debt solutions, such as a Trust Deed or an Individual Voluntary Arrangement (IVA).

Keep up with your payments

Now that your DMP has been approved, all you have to do is maintain the payment schedule you suggested in your proposal. If you set up the DMP through a third party, you will send your payments to them and they will distribute them among your creditors.

It’s important to inform your creditors and your DMP provider as soon as possible if your circumstances change to allow them to amend your arrangement as necessary.

Do IVAs and DMPs share any similarities?

IVAs and DMPs might seem like completely different debt solutions on the surface, but they do share some similarities.

We’ve outlined the main similarities between IVAs and DMPs here:

Your credit rating will be affected

Like most debt solutions, both IVAs and DMPs harm your credit rating. This can make it difficult to find a lender willing to give you a loan, mortgage, phone contract, or even a bank account during this time.

Most financial experts recommend waiting until after a debt solution has been removed from your credit report before applying for further credit. This will not only improve your chances of being accepted but also prevent a rejected application from causing further damage to your credit score.

You make affordable monthly payments

The aim of most debt solutions is to make it more manageable to afford your repayments. This can be achieved with both an IVA and a DMP.

With an IVA, your IP will base your monthly repayments on a review of your income and expenditure. DMPs are less rigid but still involve a monthly contribution that is worked out after a thorough assessment of your budget.

You can consolidate multiple debts

Having multiple debts owed to different creditors can make it difficult to know who you should be making payments to and on which dates.

Thankfully, both an IVA and a DMP can help you consolidate your debts into a single monthly payment without needing to communicate with the people you owe directly.

Unsecured debts can be included

Knowing which type of debt you have can make the process of finding a debt solution much easier.

The good news is, most unsecured debts (e.g. payday loans, utility bills, store cards, catalogues, and credit cards) can be included in both an IVA and a DMP.

IVA vs DMP: How do they differ?

IVAs and DMPs share some similarities, but there are still some key differences you should be aware of.

Here are the main differences between IVAs and DMPs:

Length

The biggest difference between IVAs and DMPs is how long they last. The average length of an IVA is five years, although they can last six years under certain circumstances.

DMPs, on the other hand, usually last between five and 10 years. This may sound like a long time, but they do allow you to deal with your debt at a slower pace as your monthly payments will typically be smaller.

Debt write-off

With an IVA, any debt left at the end of the five years will be written off – even if you’ve only repaid a portion of what you owe.

With a DMP, however, you’ll be required to make regular payments until 100% of your debt has been repaid so there will be no debt left at the end to be written off.

Creditor protection

An IVA protects you from creditor contact and harassment, allowing you to focus on repaying your debt without any unnecessary distractions or demands for payment.

A DMP doesn’t legally require your creditors to stop contacting you, but they must never harass or threaten you or anyone in your household over the debt.

Frozen interest and charges

An IVA will freeze all interest and charges on your debt before writing it off at the end of your repayment term. This usually happens after five years of agreed monthly payments.

Because a DMP isn’t legally binding, your creditors are not obliged to stop interest and charges and can continue to add fees alongside your repayments if they wish.

Third-party involvement

An IVA can only be authorised and managed by an IP, meaning you can’t apply without reaching out to a financial professional first.

DMPs tend to be a little more flexible and can be completed with a provider or without any third-party involvement if you prefer. This does, however, mean that you’ll need to manage your own payments and deal with your creditors directly.

How are joint debts dealt with in an IVA and a DMP?

Joint debt occurs when you enter into a credit credit agreement with a partner or spouse and both parties fail to make repayments as agreed. Common joint debts include loans, mortgages, and bank accounts.

Having joint debt can make it difficult to know which debt solutions you’re eligible for. We’ve outlined how joint debts are dealt with in both an IVA and a DMP below:

IVA

Because IVAs are designed for individual debts, you can’t include joint debts in your arrangement. There is nothing stopping you and a partner from getting separate IVAs at the same time, but each IVA must be applied for and completed as a separate process.

However, you may be able to enter into an ‘interlocking IVA’, which is when two separate IVAs are administered together and ‘linked’ to allow them to be paid through a single monthly payment as opposed to two. This will be considered if you have a financial connection to the other person (e.g. your spouse, civil partner, or child) as it can make it easier to manage your household finances.

With an interlocking IVA agreement, any joint debts are included in both IVAs. This allows them to be paid through both IVAs with anything still owed at the end of the five years written off.

DMP

Unlike IVAs, it’s possible to include joint debts in a DMP and repay your debts alongside another individual you share a household with. This can be a good idea if both you and the other party owe debts to multiple creditors and are struggling to keep on top of your separate repayments.

Under a joint DMP, both parties are equally responsible for the debt as well as any other financial obligations included in the arrangement. Even if you have other non-joint debts, these can also be included in the joint DMP to ensure you’re only making one payment towards all your debts.

Remember, even if you include joint debts in your individual DMP, the lender can still chase the other party for 100% of the money owed if they’re not in a DMP themselves. This is due to something called ‘joint and several liability’ which is applied when you take out a joint credit agreement with another person and essentially means both parties are liable for the full amount owed, not just their share.

Are there fees required for an IVA?

Fees are another important consideration for anyone struggling to choose between an IVA and a DMP.

With an IVA, all fees are paid out of – not in addition to – your normal monthly payments, meaning you’ll never be asked to pay more than what you owe. This means that your creditors technically cover your fees by accepting less than what they are owed.

IVA fees are made up of two main charges: the nominee’s fee and the supervisor’s fee.

The nominee’s fee covers the cost of preparing your IVA proposal and sending it to your creditors and is capped at an amount equal to or close to your first four to six monthly payments. This will be covered before any payments are made to your creditors.

The supervisor’s fee covers all the administrative work required, including the cost of organising your annual reviews, and is typically charged at around 15% of the money repaid. This will be taken after the nominee’s fee has been paid.

How much does a DMP cost?

Unlike an IVA, there are no rules about how much a DMP provider can charge. This has led to some companies charging a fee to enter a DMP and others opting not to.

When companies charge to administer a DMP, they usually take a percentage of your monthly payments. The amount they’re allowed to take is capped at 50% of your total debt.

If you later decide to cancel your DMP, you’re unlikely to get a refund and may have to pay a cancellation fee – this will be written into your original agreement.

 

Will an IVA or a DMP have a bigger impact on my credit rating?

The first thing many people consider when considering a debt solution is the impact it will have on their credit rating. Unfortunately, entering into a debt solution will almost always affect your credit rating, making it difficult to access further credit for several years.

We’ve outlined how both an IVA and a DMP could impact your credit rating below:

IVA

From the date your IVA is approved, it will be added to your credit file for six years. During this time, your credit score will decrease and you’ll struggle to get a lender to approve you for a loan, mortgage, phone contract, and even a bank account.

Even if you’re approved for credit, you’ll need to get written permission from your IP to borrow more than £500. Failure to do this is considered a breach of your IVA and can result in it being cancelled with immediate effect, leaving you liable for the debt again.

Once your IVA is complete, you should find it easier to rebuild your credit score and will have more luck getting approved for credit. This is because you’ve shown you’re capable of repaying your debt and, as a result, are no longer considered a high-risk borrower.

DMP

Unlike an IVA, a DMP isn’t listed individually on your credit report, but the debts included in the DMP are. This is because it isn’t a legally binding agreement and, therefore, isn’t listed on any public registers.

However, each debt in the DMP will be marked on your credit file as either ‘defaulted’ or ‘arrangement to pay’ (AP). An AP will stay on your credit file for six years from the date it’s settled while a default will be listed for six years from the first recorded default, meaning that some defaulted debts might be removed by the time your DMP concludes.

Remember, a DMP helps you settle 100% of your debts so your credit score will gradually start to recover after you’ve made your final payment.

Is an IVA or DMP suitable for me?

Even with all the information at your fingertips, choosing between an IVA and a DMP can feel like an impossible task – especially if you qualify for both.

Generally, an IVA will be better suited to you if your financial situation isn’t likely to improve and you want a debt solution with a clear end date. A DMP, however, could be a better option if you have multiple debts and your financial situation is expected to improve in the near future.

Both an IVA and a DMP can help you deal with your debt, but there are various other debt solutions available. Don’t hesitate to contact a financial advisor or debt management company to find out the best option for your circumstances.

Can I switch from an IVA to a DMP?

Many people voluntarily enter an IVA but later realise it’s not the right debt solution for them and request to leave. It’s certainly possible to exit an IVA and switch to a DMP, it’s not a decision that should be made lightly due to the consequences it can have on your financial situation.

Because a DMP is an informal agreement and isn’t as strict, it can be easier to switch from a DMP to an IVA. This is because a DMP isn’t legally binding, meaning you can exit your arrangement whenever you like if you decide it no longer serves you.

Once you’re sure you want to switch from an IVA to a DMP, you must inform your IP as soon as possible. They will then write to you confirming that your IVA has been terminated and instruct you to cancel any recurring payments coming from your bank account.

Some lenders would rather you tell them that while you’re cancelling your current arrangement, you intend to find another debt solution. This can reassure them that you’re still committed to dealing with the debt and are not simply trying to get out of repaying what you owe.

Conclusion

There are various debt solutions available in the UK that can help you deal with your unaffordable debt in a way that suits you. An Individual Voluntary Arrangement (IVA) and a Debt Management Plan (DMP) are some of the most popular options.

IVAs and DMPs both affect your credit rating, allow you to make monthly payments, consolidate your debt, and deal with unsecured debt. However, they differ when it comes to length, debt write-off, creditor protection, interest and charges, and third-party involvement.

If you’re struggling with debt and can’t decide between an IVA or a DMP, don’t hesitate to reach out for impartial debt advice from a financial professional. They will review your circumstances and advise you on the best course of action for you.