A debt management plan OR an individual voluntary arrangement?

Sky News recently carried out an investigation into the effectiveness of debt management plans (“DMPs”).

Their findings showed that people subject to DMPs were are seeing up to four-fifths of the money they paid being spent on the debt management company’s fees and charges, rather than their debts.

In addition, it was found that over a quarter of those who had employed debt management companies end up seeking advice about bankruptcy, or entering into individual voluntary arrangements (“IVAs”).

Here is some background concerning DMPs and IVAs, together with my views as to the pros and cons of both.

What is a DMP?

A DMP starts with your income being assessed to establish whether a monthly repayment is affordable. If so, your debt management company will contact all of your creditors in order to negotiate a reduced monthly repayment.

You will then pay the debt management company one payment each month and they will pay this on to your creditors after the deduction of their fees.

What is an IVA?

An IVA is an alternative to bankruptcy. It is a legally binding contract between you and your creditors.

A proposal is put to creditors with the assistance of a licensed Insolvency Practitioner who will carry out an initial assessment of your assets and liabilities, together with your monthly income and expenditure.

If your circumstances are suitable, the Insolvency Practitioner will commence drafting your IVA proposal. The IVA proposal is then circulated to your creditors and a creditors meeting is held. In most circumstances no creditors attend this meeting and their votes are cast by proxy. Providing that 75% or more of your creditors vote for the approval of your IVA, it will be accepted.

The associated stigma

• DMP - in some circumstances a DMP can be beneficial, especially if you are professionally qualified and wish to avoid a formal insolvency procedure such as bankruptcy or an IVA. They can also be of benefit if you work in financial services, accountancy or even law. However, you should take further advice as to what impact a DMP could have on your credit rating
• IVA - in my opinion, an IVA can be a very good alternative to bankruptcy and it gives you better control of your assets and ability to earn a living. However, it should be noted that an IVA will be detailed on your credit files for 6 years

Duration

• DMP – there is often have no end date and, as such, there is a risk that the individual could be repaying their liabilities for an indefinite period of time
• IVA - a typical IVA lasts for 5 years or until such time as 60 monthly contributions have been made

Costs

• DMP - as detailed in the Sky News investigation, up to four-fifths of the money people pay into their DMP can end up being spent on the debt management company’s fees. If you are considering a DMP, I would urge you to get a fee quote from the debt management company and carefully read their terms and conditions in this regard
• IVA - the Insolvency Practitioner in their role of Supervisor of the IVA is entitled to charge a supervisory fee, which must be agreed by creditors. Typically this fee is 15% of realisations

Interest

• DMP - you should make certain that interest on your debts will be frozen. If not, the interest will continue to accrue and quite often your debts can be increasing while you attempt to chisel away at them. Again, I would check the debt management company’s terms and conditions on this point
• IVA - the interest on your debts is always frozen from the date of acceptance of your IVA

Debt forgiveness

• DMP - there is no debt forgiveness in a DMP and, as such, the whole of your debts will be have to be repaid, which can take a significant number of years
• IVA - creditors could agree to being paid as little as 25% of the debt, with the balance being written off upon the successful completion of the IVA

Binding of creditors

• DMP - a disadvantage to DMPs is that creditors cannot be forced to be part of the DMP. As a consequence, they can take enforcement action against you, even if your other creditors have consent to the DMP. Therefore, you will have to ensure that even single one of your creditors is prepared to be part of the DMP
• IVA - providing that more than 75% of your creditors vote for the approval of your IVA, it will be accepted. Those creditors who choose not to vote either way for the IVA, will be bound by the votes cast by creditors which do

Conclusion

As detailed above, in some circumstances a DMP can be work but it is vital that you know where the money is going and if the interest is being frozen.

IVAs tend to be a more welcomed solution by creditors and it also gives you protection from your creditors, which in turn can release you from the stresses of debt and enable you to concentrate on earning a living to repay what you can.

I hope the above gives you some insight into DMPs and IVAs. If you have any questions or wish to discuss the above in more detail, please feel free to give call me on 01202 830043.