Debt Management and IVAs
When dealing with debt, there are four main courses of action open to you.
Taking a Debt Consolidation Loan
The first option to deal with various debts is debt consolidation. This is achieved by taking out a loan which you use to pay off your various debts.
By taking the loan and clearing your other debts, you have replaced your previous repayments with a single repayment. The payback interest on the loan will probably be lower, and you can also extend the amount of time you can take to repay, further lowering your monthly payment.
Another advantage of a debt consolidation loan is that it makes it simpler to have an overview of your finances. Before, you may have been dealing with various creditors requiring different payments at different rates of interest. Now you have a single, manageable repayment that is easy to remember, and your monthly financial planning is simplified as a result.
Debt Management by Remortgage
If you are considering a remortgage on your home, it is often possible to consolidate your other loans and debt into your new mortgage. This makes sense particularly where you have high-interest debt such as credit or store cards, or bank loans.
The Debt Management Plan (DMP)
A debt management plan (DMP) is an informal arrangement made with the help of a specialised debt manager. Through a DMP, your creditors reschedule your debt so that your monthly repayment is based on what you can afford, and not on what you were previously asked to pay. In some cases, it may also be possible to freeze interest and penalty charges on your accounts.
Under a DMP, you repay all of your debts under more manageable conditions than before. However, the debt management company whose aid you enlist will charge you for their services.
The disadvantage of a DMP is that it is a ‘gentleman’s agreement’, and is not legally binding on those to whom you owe money. As you are undertaking to repay all your debt, but with a reduced monthly payment, you will be paying over a longer term. Although, as was mentioned, creditors may agree to freeze interest and charges, they are not legally obliged do so. Creditors may choose to apply your reduced monthly repayments only to the interest on your accounts, which can mean that your debt will never be repaid. Furthermore, your creditors will be free to change the conditions of your agreement at any time.
With a DMP, you are changing the original conditions of your credit agreements. Consequently, a note of the Plan is added to your credit record, and will stay there for 6 years.
The Individual Voluntary Arrangement (IVA)
Unlike a DMP, an Individual Voluntary Arrangement or IVA is a legally binding contract with your creditors.
With an IVA, your creditors accept that you will never repay your full debt. This is a compromise arrangement, where your creditors accept that a full repayment of the debt will never be within your means. It is often possible to write off up to 60% of your total debt, while you repay the other 40% over a term of up to 5 years. Once this is done, you are regarded as debt-free.
When you decide to consider an IVA, your creditors must vote to accept or reject your proposal, and at least one must be in favour. If you have a large creditor to whom you owe more than 25% of your total debt, and they oppose the proposal, this is likely to block your IVA.
Once an IVA is in place, your creditors are legally forbidden to add further interest or charges to your debt. During the repayment period of the IVA, your personal circumstances will be reviewed periodically, to see if they have changed. It is extremely important to keep up repayments under the agreement, otherwise the IVA will almost certainly fail.
If you enter an IVA agreement, and you are a home owner with an endowment policy linked to your mortgage, you may be required to encash it for payment to your creditors. Similarly, you may be required to release at least part of the equity built up in your home, usually at the end of the repayment term.
