Getting your debt under control can be a very emotion and stressful time, especially when you’re not quite sure which road you should be taking. There are many different options are advertised to those struggling to keep their finances under control including IVAs and Dept Management. So, which should you choose?
Ultimately it very much depends on your situation. While one option might work for some, for others it often won’t work so here is a little more information about two of the most popular options for sorting your debt.
What Is Debt management?
Debt management is more often than not referred to as a DMP (debt management plan).
A DMP requests that your creditors freeze interest in order for you to make smaller payments without the amount you owe increasing and in most cases, they will. Debts such as bank finance (overdrafts, loans), credit cards and store catalogues are the types of creditors who almost always freeze their interest.
You then agree to pay those creditors back a smaller, more manageable fee. Often you will need to provide proof of income and outgoings, so they know that you are struggling to meet regular payments. If you miss one of these payments the creditor may withdraw the agreement, start charging interest or even sell on the debt to a collection agency.
If you choose a DMP then you will get arrears and then defaults added to your credit record. There isn’t a way to avoid this, if you can’t pay your debts then your credit record is going to take a hit.
On the positive side, DMPs are extremely flexible so if your expenses go up you can pay less. Also, if you find that your financial situation has improved such as a new job or a drop in the cost of childcare, then you can pay more off each month which speeds up the payment period – making you debt free sooner.
There is no option to write off your debt with DMP. If you’re paying £200 a month on a £10,000 debt then it’s going to take you 50 months to clear it. If that feels too long then you might want to think about a more drastic option – one of the types of insolvency such as an IVA.
What Is An IVA?
If a DMP isn’t what you’re looking for then why not look at an IVA? What is an IVA you ask?
An IVA (individual voluntary arrangement) is an alternative to a DMP, and a little less well known. They can vary but typically the last five or six years depending on whether you can remortgage your house to raise the additional income but at the end of the five/six years your debts are written off.
Having your debts written off at the end is the main advantage of an IVA and for many people, it is much quicker than a DMP. But you do have to look at the downsides.
Unlike a DMP, you HAVE to go via a company who specialises in IVAs so they come at an additional cost.
An IVA is a type of insolvency, much like bankruptcy. It will be on your credit record for at least six years. During that time you won’t be able to get a mortgage or other finance such as car PCP (even renewed) or loans and it may be difficult to rent as you will fail a credit check.
Any extra money acquired, whether it’s through work or an inheritance, has to go to your IVA.
An IVA is a legal contract with very little flexibility. You have a few options such as maybe taking a break if things become difficult (redundancy, illness etc) but that time will be added on at the end of your contract period. So, if you’re considering an IVA make sure you’re in a secure position at work/
So, Which Should You Choose?
Sit down and think about what you hope to achieve over the next five or six years.
If you have a secure, stable job, your family or relationship plans are unlikely to change (getting married, having children etc) or a move house, then you may want to consider the 5 year commitment to an IVA and benefit from the debt write-off at the end. If things are uncertain, the more flexible DMP is probably the better option for you.
Then again, you could look at your other options. If you are renting your home then bankruptcy might be a much better option than an IVA – over much quicker, seven out of eight people don’t have to make any payments at all and it can’t fail!
Ultimately, make sure you seek proper finance advice from a free service such as StepChange before committing to any repayment plans.