DMP, IVA or Consolidation Loan?

An Independent Voluntary Arrangement, or IVAs, is a legally binding formal agreement accepted by the county court as the means by which you propose to pay outstanding debts to your creditors. This more formal method of getting your debts under control is likely to be necessary if your creditors remain unconvinced by a less formal debt management plan you might have drawn up, or if your debts are quite large in relation to your disposable income, or if the debts have been allowed to accumulate over a longer period of time.

Although the agreement of an IVA with your creditors will involve the county court, it is still one step away from the court making a judgment of the debt against you (a county court judgment, or CCJ) and two steps away from a Declaration of Bankruptcy – both of which, of course, would leave you in considerably worse difficulties in securing credit in the future.

It is important to note, however, that your IVA, just as any debt management plan that might have been tried earlier, still needs the agreement of your creditors. Although the latter will be given a greater degree of reassurance because of your formal legal undertaking with the court, an IVA is likely to need your commitment to repay reasonably large amounts during a three- or five-year period. At the end of that time, however, the court accepts and your creditors agree that any remaining debt is then written off.

You will generally find that creditors are more disposed to go along with an IVA if it includes substantial lump sum repayments at the beginning of the period, as an expression of your determination to clear as much of the debt as possible. These lump sum payments would then, typically be followed by monthly repayments of whatever you could realistically afford. In calculating this latter amount, the IVA usually takes as its reference point the sums your creditors would be likely to get back if the court declared you bankrupt. That, of course, is something you’re trying to avoid, by offering your creditors initial lump sum payments, or quite significant monthly repayments, or a combination of both.

By comparison, therefore, an IVA is rather like a more formal, legally binding debt management plan. With both plans, you’d be looking to offer the biggest surplus between your income and essential expenditure, with which to pay off your debts. In both cases, you might find it helpful to attempt some measure of debt consolidation and help from a debt advice agency is going to provide a good starting point to set the wheels in motion.

If the debt advice you receive is for an IVA, then you’ll need to engage the services of an insolvency practitioner to draw it up. The insolvency practitioner might be a solicitor, an accountant or a specialist firm authorised to draw up IVAs. Whoever it is, will of course be charging for the service and these fees are generally included in the IVA itself, so that you’ll be paying off both the debts and the insolvency practitioners fees at the same time. Clearly, you’ll need to know how much you are being charged for this service, since the fees can be in the thousands of pounds, even for a relatively uncomplicated IVA.

Although the insolvency practitioner will be responsible for drawing up the IVA, convening meetings of creditors and seeking their agreement to its terms, once it has been agreed, you become responsible for managing the IVA and ensuring that you keep up whatever payments have been promised.

As a formal and legally binding agreement, an IVA is not to be entered lightly: 

• It is generally used for larger debts or debts that have accumulated over a longer period of time than those resolved through a debt management plan, for example;

• IVAs typically last three-five years at the end of which the balance of the debt or debts are written off;

• You’ll need to engage an insolvency practitioner to draw up the IVA and negotiate its agreement with your creditors;

• After which, the IVA and the management of your debt is entirely in your own hands.

The author of this IVA article is John Smith.

This article does not represent ‘financial advice’ as the individual requirements of each person will be unique to their own specific needs. If there is something in the article which you would like to rely on, please ensure you check those details with the person or business with whom you arrange a financial service.

The views in this article represent those of the author and not those of Netbasic Limited.