If youre in debt, you may have heard of debt management plans and of IVAs (Individual Voluntary Arrangements). You may wonder how they differ and you may wonder most importantly which one could be right for you.



Lets start with four important points:





First: theyre both arrangements that could help you if you cant keep up with your monthly payments to your unsecured debts.



Second: they can both involve asking professionals to help you pay off your unsecured debts at a rate you can afford (professional help is a fundamental part of an IVA, but anyone thinking of debt management can either talk to their lenders themselves or ask a debt management organisation to do it on their behalf).



Third: one (debt management) is an informal plan, while the other (IVA) is a legally binding agreement between you and your lenders.



Fourth: they arent the only debt solutions youll need to talk to a debt adviser who understands the various debt solutions available and can provide advice on which one is most appropriate for someone in your situation.



Debt management plans

For anyone who goes to a debt management organisation, a debt management plan starts when you ask them to help you clear your debts. When you tell them what you owe, what you earn and what you need to live on, they can help you figure out how much you can realistically afford to pay towards your unsecured debts every month after taking your essential living expenses into account.



Once youve agreed on that figure, theyll contact your unsecured lenders and ask if theyll consider making a few changes to your repayment terms. They may agree to freeze interest, for instance, or waive charges. Perhaps most important, they may agree to accept lower payments.



If your lenders agree to the plan, youll start making the agreed monthly payments. The debt management organisation will usually handle all correspondence between you and your lenders, and re-negotiate if any change in your circumstances leads to an increase or decrease in the amount you can pay to your lenders if your income drops, for example, or your mortgage payments drop.



IVAs

As a form of insolvency, an IVA can actually write off some of your debt. Its a legally binding agreement designed to help people who are unable to repay their debts within a reasonable time period.



Like debt management, an IVA involves making regular monthly payments, based on the maximum you can afford once all your essential expenses have been taken into account.



However, it will have a much bigger impact on your credit rating than a debt management plan. This may make it more difficult and / or expensive to be approved for credit for a year after its finished. For the duration of the IVA (normally, five years) the amount of credit youll be allowed to apply for will be severely limited.



To enter into an IVA, youll need to talk to an Insolvency Practitioner (IP). Together, youll draw up an IVA Proposal a document that tells your lenders how much they can expect to receive if they approve the IVA. If the Proposal is approved by lenders who collectively own 75% of your debt, the IVA can go ahead.



If its approved, youll spend (in most cases) 60 months making your monthly contributions and if youre a homeowner you may be required to release some of the equity in your home in the 54th month. If all goes well, any outstanding debt will be written off at the end of the IVA.