Choosing between an IVA or a DMP

IVAs and DMPs are very different debt solutions.

Neither of them is best for everyone. It depends on your current situation and how that might change in the future. Looking at the differences between IVAs and DMPs is the best way to decide which is right for you.

IVAs are individual arrangements. But most IVAs follow a standard pattern and that is what I am describing here.

NB If you owe less than £30,000, you don’t own a house and you have little money each month for your debts, have a look at a Debt Relief Order (DRO) instead. A DRO is ALWAYS better for you than an IVA.

Contents

DMPs are good temporary solutions – IVAs aren’t

You can easily change a DMP to pay more or less.

You can end an IVA by failing it or by settling the debts, but it’s not simple and can have significant downsides. The insolvency marker will remain on your credit file for 6 years (see below) and you will also have incurred the IVA fees.

making a choice: If there is a good chance that your finances will improve soon you probably should choose a DMP. If your finances improve in an IVA you will have to pay a lot more each month into the IVA and it doesn’t end any sooner.

If you think your finances may get worse, because of inflation or your income may fall, then an IVA may fail, DMPs are more flexible, see below,

think about: If you may be able to make affordability complaints and get refunds, start off with a DMP while you make complaints. Some good refunds may mean your DMP ends much sooner! Affordability complaints do not speed up an IVA.

An IVA has a guaranteed end-point – a DMP hasn’t

IVA normally end after 5 years, with an extra year being added if you have equity in a house but can’t release it. At that point, your IVA is completed and any remaining debts are written-off.

But some IVAs go on for much longer than planned. Some last for more than seven years because people needed payment breaks or had to pay in extra money from overtime or bonuses.

A DMP goes on until you stop it or you have cleared all of the debts. This could take three or four years, but it could still not be finished after twenty! When you are choosing between an IVA and a DMP, you must work out how long your DMP is likely to last, this is a crucial piece of information.

You may know your situation will improve after a few years – when your high childcare costs end, or when you car finance is finished. Here a DMP may sound very long at the start, but then you will be able to increase the payments to it and finish it a lot earlier. In an IVA, your payments will just increase at that point and the IVA will not end any sooner, unless you have repaid all the debts in your IVA in full plus the IVA fees.

making a choice: If your DMP is going to be very long, then an IVA instead could be a speedier solution. But if you expect your situation to improve that will speed up a DMP but not an IVA

Many IVAs fail as their payments aren’t flexible – DMP payments are

In a DMP, repayments are flexible. They can be cut if your hours drop or you have additional expenses. The downside of doing this is that your DMP takes even longer to complete.

In an IVA, if things go wrong there is limited flexibility built-in. Payments can be decreased by 15% or there can be a payment break of nine months – see What happens if you can’t afford the IVA payments.

But large problems, especially in the first few years of an IVA, may mean your IVA fails, leaving you back with your debts. Statistics show that more than a third of IVAs started in 2016 and later are likely to fail.

This high failure rate may get worse because of high inflation in 2022 and 2023.

making a choice: If you have a very variable income, making a five-year commitment to an IVA would be unwise.
If you have a regular income, now and your job feels secure, are any of your expenses are likely to change significantly? Might you need a new car, or have another baby, or will your benefits stop when a child leaves school? What is going to happen when your energy bills go up 20% in April 2023?

An IVA has to be agreed by a majority of your creditors – DMPs don’t

An IVA has to be approved by 75% (by the value of their debt) of creditors who vote at the meeting. If you have a very large creditor, they have effectively a veto over the IVA. For example, a large creditor may say they will only accept a proposal if it is for six years not five. This isn’t common – your Insolvency Practitioner should know if your creditor list is likely to prove ‘difficult’ and will discuss it with you.

A DMP isn’t voted on by your creditors so it can’t be rejected.

Interest stops in an IVA – this usually happens in a DMP but it isn’t guaranteed

All your creditors in an IVA are bound by the IVA and cannot add more interest, even if they voted against the IVA.

In a DMP, your creditors are asked to not add new interest or charges. The large majority do agree if they are presented with a reasonable Income and Expenditure sheet by your DMP firm.

In 2023, creditors know that many customers just can’t afford the normal payments any longer and few now carry on adding interest. Most of the cases I see now have been an admin error by the lender and when you complain, the lender is likely to remove the interest added.

The Financial Ombudsman has upheld some customer complaints where a catalogue or credit card hasn’t stopped adding interest.

making a choice: If other factors are pointing towards a DMP, you could start a DMP and 6 months later change to an IVA in the rare event that you have problems with creditors continuing to add interest or charges.

An IVA can feel more intrusive than a DMP

An IVA has to be set up by an Insolvency Practitioner, there is no “DIY” option. You will have to supply your Insolvency Practitioner with a lot of details and paperwork before your IVA is set up. They will ask for copies of your payslips and bank statements at the annual IVA reviews.

An IVA is also a matter of public information – your name will be on the Insolvency Register.

If you set up your own DMP (see this article about a CAB system that can help) you don’t have to discuss your affairs with anyone else, but you will still have to send your creditors an Income and Expenditure Sheet to persuade them to freeze interest.

If you use a company to run a DMP for you (NB never use a commercial firm that charges you fees!) then you will have to talk through your budget with them at the start and at reviews, but it will be simpler than setting up an IVA.

making a choice: If you need the security of an IVA, these are the inevitable side effects. For most people, they won’t seem like a major factor in making their decision.

Safeguarding your house

In an IVA, your creditors cannot take legal action against you: they can’t get a charge over your house or make you bankrupt. For the duration of the IVA, your house is, therefore, safe. Assuming of course that you can pay the mortgage and any secured loans.

In the last year of an IVA, if you have significant equity you may have to remortgage or get a secured loan to release some money for your IVA. Some people in an IVA are asked to take out secured loans at horrifying rates of interest instead of a remortgage. See this story of one person being offered a 15 year secured loan at 19% interest.

In a DMP your creditors can try to get a charge over your house or make you bankrupt. This is very unusual for a consumer debt, especially at the start of a DMP, but it is a possibility especially if you have significant equity and your DMP is likely to last for a long time. It is more likely to happen where you have given a guarantee or for business debts. If you are concerned about whether this is likely to be a problem for your DMP, it might be helpful to discuss it with StepChange.

making a choice: protecting a house with significant equity is one of the main reasons to prefer an IVA over bankruptcy – but possibly having to take out a secured loan at a high rate of interest is a big problem with IVAs.

Many people worry more than they need to about the very small risk to their house in a DMP.

Effect on your credit record

An IVA is a form of insolvency and has the same bad effect on your credit record as bankruptcy. The IVA marker on your credit record will remain for 6 years or until your IVA is completed – many IVA takes much longer than 6 years as people have to take so many payment breaks which just extend the term of the IVA.

The IVA marker will remain even if you settle your IVA early or repay your debts in full. It creates difficulties:

if car finance ends during your IVA. See IVA and car finance for details.
it makes it very hard to get a new private tenancy without a gurantor.
when you need to remortgage during your IVA.
after the IVA has ended and the marker has gone, you are still normally asked in a mortgage application if you have ever been “bankrupt or in an IVA” or if you have ever been “insolvent”.

The effect of a DMP on your credit record is not so bad but it’s more complicated as there is no definite time at which creditors have to mark debts as defaulted.

If your DMP may be temporary, you don’t want them to default your debts at the start, but in a long DMP it’s better if debts have defaulted because then they fall off your file after six years – see this article for more details.

making a choice: The impact of an IVA is worse for your credit record than a DMP. This is a side effect of your chosen debt solution you should be aware of… but it is less important than other factors such flexibility or the length of time until you are debt-free in deciding which is best for you.

Summary

IVAs are formal legal contracts. They have a fixed duration and all creditors are bound by them which is good, but they are not easily changed. It is essential that you are sure you can live on your allowed budget and that you think what may change over the next few years. Do not sign up in a hurry to an IVA and later regret it.

DMPs are an informal debt solution. They can be short or long-term. Creditors are likely to freeze interest but cannot be forced to. They are flexible so you can change your payments. If you have a lot of debt, especially if you also have a house with equity, then you should probably look at formal debt solution such as an IVA to see if that would be a quicker and more secure approach to clearing your debt.

This is a really hard choice to make:

an IVA that fails is a disaster and too many of them do.
being stuck in a seemingly endless DMP isn’t a good idea either.

You may feel that you need a crystal ball because of all the things that could change in the future! If neither feels right for you, look at the other possible choices such as a debt relief order if you are renting, bankruptcy, selling your house, getting a lodger, etc.

If you are feeling completely stuck, then you could start with a DMP and review it after 6 months, when it will be clearer how you cope on a restricted budget and whether your creditors have frozen interest.

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