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Given today's economic climate it's little wonder that so many of us experience financial problems and turn to a variety of debt management solutions to sort things out. Two of the most common routes to take here today are IVA and debt management plans. Let's take a look at how these solutions work and how they compare.
An IVA is a legal debt management agreement that will usually last for around five years. It aims to reduce your debts by making agreed monthly payments to your creditors so that you can then make a clean start once it is done. In most cases you need to owe over £15,000 to a specific number of creditors to take this route.
You cannot run an IVA yourself so you'll need to use a licensed Insolvency expert such as a solicitor or accountant here. In basic terms, you will make a proposal to your creditors telling them how much you can afford to repay every month. You need to convince the creditors that hold 75% of your debts to accept your proposal before it can be set up. Once your IVA is in place your creditors cannot legally chase you for money as long as you adhere to its conditions. You may also be able to arrange for interest to be reduced/frozen and your outstanding debts will be written off once the IVA is done.
If you opt for a debt management plan then you will once again agree to make a monthly repayment to creditors to reduce the money that you owe. This will often be done via a debt management company who will manage your plan and make payments on your behalf. This often involves a one off set up fee and a monthly administration cost. Or, if you prefer, you can set up your own plan and deal with creditors yourself.
If you are using a debt management company then they will try and get your creditors to freeze/reduce interest charges to cut down on your costs. This kind of plan does not have a specific time frame associated with it. Your creditors here also do not have to stick with the plan if they later change their minds.
There are many similarities between these two options. Both, for example, aim to help you reduce your debts by paying back what you can afford every month. They also both aim to reduce debt growth by asking creditors to take action such as freezing/reducing interest and writing off certain debts.
There are also various differences to consider. You can only take out an IVA if you owe over a certain sum whereas a debt management plan can work for smaller debts. Both options may be able to reduce or freeze interest but only an IVA can write off debts that you cannot repay at the end of your agreement. However, an IVA will usually last for five years whilst a debt management plan can run for shorter or even longer periods. Finally, an IVA is a legal agreement to which you and your creditors must abide whereas you can both opt out of a debt management plan whenever you like.
