IVAs and DMPs are very different debt solutions. The advantages and disadvantages of IVAs are discussed here; and of DMPs are discussed here. Neither of them is “best” – it all depends on your current situation and how that might change in the future. Looking at the differences between them 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.
UPDATE In June 2021, the eligibility requirements for a Debt Relief Order were relaxed so more people can have one. 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 DRO – if you qualify for one, it is ALWAYS better for you than an IVA.
DMPs are good temporary solutions – IVAs aren’t
You can easily stop a DMP whenever you want and resume the normal debt repayments.
You can end an IVA, but it’s not simple and can have significant downsides: the IVA marker will remain on your credit file (see below) and you will also have incurred the IVA set-up fees.
making a choice: If there is a good chance that your finances will improve soon and that afterwards you will be able to pay off your debts normally, you probably should choose a DMP.
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!
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 completes and any remaining debts are written-off.
But some IVAs go on for much longer than planned – a few are still ongoing after nine years because people needed payments 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.
making a choice: If your DMP is going to be very long, then an IVA instead could be a speedier and a more assured solution.
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. A DMP that you initially thought might take an acceptable seven or eight years could stretch to a very long time.
In an IVA, if things go wrong there is some 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 the debts. Even before the pandemic, the trend for IVA failures was going up fast, with 25% failing in their first 3 years. Statistics show that more than a third of IVAs started in 2016 and later are likely to fail.
This high failure rate may well get worse because of high inflation in 2022.
making a choice: If you have a very variable income, making a five-year commitment in 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 to your energy bills and petrol costs?
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 is proposed to creditors individually. Even if one of them refuses to ‘accept’ your offer, you can still go ahead and make the proposed reduced payments, but not every creditor may freeze interest. This is less of a problem now than it used to be – you can complain and take a catalogue or credit card or other lender to the Financial Ombudsman if they refuse to freeze interest in a DMP.
All interest is frozen in an IVA – this isn’t guaranteed in a DMP
In an IVA, all your unsecured creditors are bound by the IVA and cannot add interest, even if they voted against the IVA.
In a DMP, your creditors are asked to freeze interest and not add charges. Most do agree if they are presented with a reasonable Income and Expenditure sheet. You can challenge a refusal, although this isn’t guaranteed to work, the Financial Ombudsman has been upholding some customer complaints where a catalogue, credit card or loan firm 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 if, unusually, you have a lot of problems with creditors continuing to add interest or charges.
An IVA may seem 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 and at annual 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 for making their decision.
Safeguarding your house
In an IVA, your creditors cannot take legal action against you: they can’t get CCJs and then 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. It is incredibly rare for someone to be offered a remortgage so you feel (and your IVA firm may tell you at the start) that this won’t happen. BUt some people are being asked to take out secured loans at horrifying rates of interest, 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 you need to be aware of 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 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 marker is added to your credit record – this will make it hard or impossible to borrow money, which is likely anyway to be against the terms of your IVA. The marker 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.
The IVA marker is a major problem – it is seen as much the same as bankruptcy. It creates difficulty:
- if you have car finance (PCP or lease) ending during your IVA. See IVA and car finance for details.
- when you need a new private tenancy (unless you have a guarantor).
- when you need to remortgage during your IVA.
- after the IVA 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 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 that it is good to 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.
IVAs are a formal legal contract. 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, but 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 releief 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.