Debt management and IVAs
In the second quarter of 2010, 13,466 people in England and Wales entered an IVA (Individual Voluntary Arrangement)
. That works out to over 140 people per day.
However, as insolvencynews.com reports, figures like this aren't necessarily as worrying as they may seem.
Pay Boyden of PricewaterhouseCoopers stressed that when someone enters an IVA, it does mean they're doing something about their debts: "This figure might seem alarming, but it does indicate that individuals facing financial pressures are taking affirmative action to address their difficulties."
After all, the typical IVA lasts five years - and once it comes to a successful conclusion, the borrower's remaining unsecured debt is written off. An IVA is a serious commitment, but if someone has no idea when (or if) they'll be able to repay their unsecured debts, they may well see the prospect of doing so in just five years as a big improvement on their current situation.
Debt management or IVA?
However, an IVA isn't always the answer. According to insolvency trade body R3, an estimated half million people are currently clearing their debts through a debt management plan.
A debt management plan is an informal (not legally binding) agreement between a borrower and their unsecured lenders, who are asked to accept smaller monthly payments that the borrower can afford without using the money they need to keep for mortgage/rent, food, utility bills and other essential expenses. Lenders don't have to agree, but if it looks like the best way forward, they're likely to. They may also agree to freeze interest and waive charges on the debt.
Unlike IVAs, debt management plans won't actually write off any of the borrower's debt, but they do offer advantages over IVAs in other ways.
For instance, they tend to be more flexible - if the individual's circumstances deteriorate while they're on a debt management plan, they may find their lenders are willing to accept lower payments. This can happen on an IVA as well, but any significant change to the terms of the IVA is likely to require an IVA variation (a legally binding change to the terms of the IVA, which would have to be agreed like the original IVA terms).
Plus, entering a debt management plan will have less of an impact on someone's credit rating. It will affect it, since they're no longer making the payments they agreed to make when they took on the debt in the first place, but an IVA is a form of insolvency and will have a greater impact on their credit rating.
How do I know which is right for me?
In some ways, IVAs and debt management plans are quite similar - and figuring out which one would be more appropriate for an individual borrower can be difficult. Furthermore, IVAs and debt management plans aren't the only solutions that help people who are worried about their debts.
That's why it's important to talk to an expert who understands how the various different debt solutions work: their pros, their cons, their criteria, how lenders view them, etc.
Entering the wrong debt solution can easily make a borrower's financial situation much worse, so finding the approach that's right for them is absolutely essential.
Debt management and IVAs
By: Melanie Taylor
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