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Dealing with debt can be a stressful experience – especially if your debts have become unmanageable. If this is the case for you, it is important that you find the right way to deal with those debts.

There are several debt solutions available, each of which is designed to help people in different situations, and each of which has its pros and cons.

For borrowers who simply can’t afford to keep up with payments towards their unsecured debts, two of the most common debt solutions are IVAs (Individual Voluntary Arrangements) and debt management plans.


What’s the difference between an IVA and a debt management plan?

IVA:
An IVA is a formal debt solution – a legally binding agreement between you and your unsecured creditors. If you can agree on the terms, you will commit to repaying as much of the debt as you can afford over a set time period, and they will agree to write off the rest at the end of the IVA (as long as you’ve fulfilled your side of the agreement).

One of the benefits of an IVA is that because it’s a formal debt solution, your creditors can’t decide to opt out once the agreement has begun. You will know the terms of the agreement from start to finish, and can rest assured that your payments will fit around your other essential costs (mortgage/rent payments, utility bills, food, etc.).

However, there are drawbacks to an IVA. For example, entering an IVA will show up on your credit report (it’s a form of insolvency, after all), and will stay there for six years. This will affect your ability to obtain further credit for this time. What’s more, if you’re a homeowner, you may be required to release some of the equity in your property during the final year of the agreement – this will be used to repay more of your debt.

In most cases, an IVA would not be suitable for you if you could not commit to making regular payments.

Debt management plan:
A debt management plan is an informal agreement between you and your unsecured creditors, in which you will make reduced monthly payments towards your debts, based on an amount you can afford to pay each month without taking up funds you need for your other essential costs.

It is important to note that by arranging to repay your debt in smaller amounts (i.e. more slowly), you will be in debt for longer, and may end up repaying more overall due to interest – although your creditors may agree to freeze interest.

You can, if you want to, arrange a debt management plan by negotiating with your creditors on your own, but because of the volume of work involved, many people prefer the convenience of letting a professional debt management company negotiate with their creditors on their behalf.

Your creditors are not obliged to agree to the terms of the debt management plan, and once the plan has started, they will usually only be committed to it for a set period of time, after which they’ll decide whether it makes sense to continue with the agreement.

So a debt management plan may offer less certainty than an IVA, but it will have a smaller impact on your credit report – you may be defaulting on your original agreements, but you’re not entering insolvency.