If you can't keep up with your debt payments, then a professional debt management plan or an IVA (Individual Voluntary Arrangement) may be suitable… but which one?
Although they aren't the only debt solutions available, either of them could help borrowers:
- Reduce or freeze the interest they're paying
- Reduce their monthly debt payments
- Plan out a practical, affordable route out of debt
In some respects, they are actually quite similar. They both:
- Help people who cannot afford to keep up with their current debt repayments.
- Deal directly with unsecured debts (overdrafts, credit cards, unsecured loans, etc.), while helping the borrower ensure can meet their secured debt repayments.
- Involve speaking to a debt expert, asking them to negotiate with creditors on the individual's behalf.
- Help to simplify the borrower's financial situation, replacing multiple repayments with just one, affordable payment. This sum is paid to the financial organisation, which will subsequently distribute funds amongst the lenders as agreed. (Note that some debt management organisations may not offer this service.)
On the other hand, they are very different:
- IVAs are specifically designed for people with unmanageable debts, who can't afford to repay them in a reasonable amount of time, although they can commit to making reduced monthly payments.
- Debt management plans are designed for people with debts that they can afford to repay within a reasonable amount of time.
- An IVA is a legally binding agreement, which means that once it has begun, lenders and borrowers cannot change their terms (unless an IVA variation is agreed to).
- A debt management plan is an 'informal agreement' - the terms aren't legally binding.
- If an IVA begins, interest on the debt will be frozen.
- With a debt management plan, lenders aren't legally obliged to freeze interest, although in most cases they will consider any changes that help the borrower repay their debt.
- An IVA will normally last for 5 years. After it has come to a successful conclusion, any outstanding debt will be written off.
- Debt management plans don't have a set duration period. It depends on a range of factors: for example, how much money the borrower owes, how much they can afford to pay, and whether or not the interest has been frozen/reduced. The plan might be accelerated if the borrower's circumstances improve, but could be extended if they deteriorate further.
So who are they suitable for?
If you're wondering which debt solution may be more suitable for you, reading through a checklist in itself isn't enough to give you more than a rough idea. Everyone's circumstances are different and it is important to get personalised advice from a professional debt adviser before committing to anything.
And it's important to recognise that different debt solutions come with different drawbacks as well as benefits.
With over 15 years industry experience, I have written articles on a wide range of subjects from
debt to mortgages.
