If you’re dealing with unmanageable debt, two of the most common solutions you might come across are an Individual Voluntary Arrangement (IVA) and a Debt Management Plan (DMP). Both can help you regain control of your finances, but they work in very different ways.
In this guide, we’ll explain the difference between an IVA and DMP, outline the pros and cons of each, and help you decide which might suit your situation. By the end, you’ll have the information you need to have an informed conversation with a qualified debt adviser.
What is a Debt Management Plan (DMP)?
A DMP is an informal agreement between you and your creditors to pay back non-priority debts in reduced monthly amounts. It’s not legally binding, which means it’s flexible and can be changed if your financial situation improves or worsens.
You can set up a DMP yourself or through a debt management company, which will handle negotiations with your creditors and distribute your monthly payment.
A DMP typically covers unsecured debts such as:
- Credit cards
- Personal loans
- Store cards
- Overdrafts
- Buy now, pay later.
What is an Individual Voluntary Arrangement (IVA)?
An IVA is a formal, legally binding agreement between you and your creditors. It’s set up and managed by an Insolvency Practitioner, and usually lasts five or six years. At the end of the term, any remaining unsecured debt included in the IVA is written off.
IVAs cover most unsecured debts, such as personal loans, credit cards and council tax arrears. However, there are a few debts IVAs don’t cover, including:
- Secured loans
- Student loans
- Child support payments
- Court fines.
You make one affordable monthly payment, which is divided among your creditors. As it’s legally binding, creditors can’t take further action against you once the IVA is in place.
The key differences between IVA and DMP
While both solutions involve making regular payments towards your debts, there are some fundamental differences:
- Formality
An IVA is a legal contract which you and your creditors have to stick to once it’s approved. A DMP is an informal arrangement meaning you and your creditors can change your minds at any point.
- Debt write-off
At the end of an IVA, remaining eligible debt is written off. In a DMP, you repay the full balance unless your creditors agree to partial settlement.
- Legal protection
An IVA prevents creditors from taking further legal action. A DMP doesn’t offer this protection.
- Flexibility
A DMP can be adjusted more easily if your circumstances change, whereas an IVA has stricter rules and penalties for breaking the terms.
- Eligibility
IVAs generally require a higher level of debt and a regular income, while DMPs can be used for smaller amounts and more varied financial situations.
Is an IVA better than DMP?
The short answer is: it depends entirely on your circumstances. An IVA may be more beneficial if:
- You owe a significant amount of unsecured debt (typically over £6,000)
- You have a steady income and can commit to fixed monthly payments
- You want legal protection from creditors
- You meet the eligibility criteria set by the Insolvency Practitioner.
A DMP might be better suited if:
- You owe a smaller amount of debt or have a limited number of creditors
- You want a flexible arrangement that can change with your income
- You’re not eligible for an IVA due to low income, fluctuating earnings, or the type of debt you have
- You prefer an informal agreement without the legal commitment of an IVA.
DMP or IVA: which is best for you?
When deciding if a DMP or IVA is best for you, it’s worth weighing up the pros and cons of each.
Pros of a DMP
- One combined monthly payment
- No formal insolvency record
- Little to no contact with creditors
Cons of a DMP
- No legal protection from creditors
- You repay the full balance unless creditors agree otherwise
- May take a long time to clear the included debts, especially with low payments
Pros of an IVA
- Legally binding – creditors can’t take further action once it’s in place
- Any remaining eligible, unsecured debt is written off at the end
- One affordable monthly payment
Cons of an IVA
- Appears on the public Insolvency Register during the term
- Stays on your credit file for six years from approval date
- Windfalls can impact your repayment plan
The effect on your credit rating
Both an IVA and a DMP will impact your credit rating. Reduced payments under a DMP can be recorded by creditors but if you keep up with DMP repayments, this looks better on your credit reference file than unpaid debts.
An IVA is recorded on your credit file for six years from the start date and will be visible on the Insolvency Register until completion. This can make getting credit harder during the arrangement and for some time after.
Costs and fees
With a DMP, fees depend on whether you use a free debt charity or a fee-charging debt management company. Fees you may encounter include:
- Arrangement fee – covers the work of setting up your plan, including reviewing your finances, preparing your budget, and contacting your creditors
- Monthly management fee – taken from your regular payments to cover ongoing administration and communication with creditors.
An IVA has fees that are built into your agreed monthly payment, covering the work of the Insolvency Practitioner. These fees include:
- Nominee’s fee – for preparing your IVA proposal and organising the creditor meeting
- Supervisor’s fee – for managing the IVA once it’s approved, including distributing payments to creditors
- Disbursements – smaller costs linked to running the IVA, such as registration and insurance.
Get debt advice for DMPs and IVAs
As both solutions have serious and long-lasting effects, it’s important to speak to a qualified debt adviser before making a decision. They can review your full financial picture, check your eligibility for each option, and suggest alternatives if neither is suitable.
You can get free debt advice from MoneyHelper. Alternatively, contact us at MoneyPlus for confidential advice and expert support, so you can make the decision that’s right for you.
