Financial Resource

Each year, hundreds of thousands of people use informal debt management plans to try and resolve their debt problems. However, with these plans often lasting for many years, would debtors be better off considering an IVA or even bankruptcy?

Unofficial estimates have suggested 100,000 people every year carry out DMP’s. I think the real number is actually much higher than this. If you consider that approximately 10,000 people go into some form of formal insolvency (IVA, bankruptcy or debt relief order) each month, I suggest that double this number are undertaking informal debt management. This could be up to 250,000 individuals every year.

Flexibility

DMP’s do have a number of advantages. These generally revolve around flexibility. It is possible to leave creditors out of a debt management plan. This is useful if you want to maintain any lines of credit such as a particular credit card or bank overdraft facility.

You can change the amount you pay into a debt management plan at any time. This means that if your financial circumstances improve, you can pay more to your creditors and pay off your debt faster. Equally, if things get worse, you can reduce the amount you pay into your plan.

Another key advantage of a debt management plan is that you are not obliged to release money from your property to put towards the repayment of your debt. As such, if you have a large amount of equity in your house, you can agree to reduce your payments to creditors without being forced to remortgage your property.

No light at the end of the tunnel

Despite the advantages of DMP’s, there are some downsides. Primarily, there is no agreement for creditors to write off debt. This means that you must repay everything that you owe. On the face of it, this seems perfectly reasonable. However, if your debt is particularly large, using a debt management plan could mean that you will remain in debt for many years.

In addition, there is no legal requirement for creditors to stop their interest and late payments for debtors who are using debt management plans. As such, there is no guarantee that balances will decrease each month and no specific end date to the debt problem can be given.

If you are considering a debt management plan or are already using this type of debt solution, you must consider how long it will take to repay your debt. A simple measure is to divide your total debt by the amount you can repay each month. This will give you the total number of months that the plan will last. Remember that this number is not guaranteed as your debt may increase over this time with additional interest and charges.

An IVA will provide a fixed end date

If you feel that the length of time it is going to take to repay your debt using debt management is unacceptable, it would certainly be worth your while considering the alternative options open to you.

The significant advantage of formal legally binding debt solutions such as Individual Voluntary Arrangement and Bankruptcy is that they involve creditors writing off debt. Typically creditors write off up to 50% of total debts in an IVA. This means that the agreement only lasts for a specific amount of time, after which you will be debt free.

Of course, formal debt solutions are not suitable for everyone. If you simply need a breathing space until your circumstances improve, then debt management may well be the right for you. In addition, if you have equity in your home but want to avoid releasing any of this for the benefit of your creditors then debt management should be considered.

However, if using a debt management plan will leave you repaying your debt for many years, then you must ask yourself whether it is the right solution for you. In these circumstances, it is important to investigate whether an IVA or even bankruptcy could work better for you.

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