Debt management plans and individual voluntary arrangements; options if you can’t pay off your debts

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If you’re struggling to pay back money you owe, don’t feel there’s nothing you can do. There are several different options available to you. The key is to talk to a debt adviser as soon as you realise you have a problem.

Ways to deal with your debts: debt management plans, IVAs and DROs
There are several different options available to you if you can’t pay back the money you owe. Three of the most popular are:

  • Debt management plan (DMP): A debt management plan is designed to give you more time to pay off your debts at a level you can afford. It’s best suited to what are called ‘non-priority debts’ such as credit cards, personal loans, store cards, payday loans and overdrafts. Instead of making lots of payments to all the companies you owe money to, you make one payment to the debt advice charity you’re getting helped by and they distribute it to the different companies.
  • Individual voluntary arrangement (IVA): An individual voluntary arrangement is a legally binding agreement that means you may be able to get up to 75% of your debts written off. It freezes your debts. You make payments for a set period but whatever you owe after that is written off.
  • Debt relief order (DRO): A debt relief order is a cheaper option than bankruptcy but it is only available if you owe less than £20,000 in England or Wales (£15,000 in Northern Ireland). It’s not available in Scotland.

Debt management plan (DMP)
The first stage is for a debt adviser to go through your income and expenditure, prioritising money you owe on things like rent, mortgage, gas and electricity and leaving you enough to live on. (There’s a guide to priority debts on the National Debtline website and there’s also a download on dealing with priority debts if you live in Scotland).

SAVVY TIP: There’s more on what to do if you’re struggling with your debts and priority debts elsewhere in this section.

– The next stage is to see if you have enough money left over to make a realistic offer to the bank, credit card companies etc.

SAVVY TIP: Companies can still write to you or telephone you once they’ve agreed to a DMP, although the best ones don’t.

– The debt advice charity will ask creditors to freeze interest and take no further action, although there’s no guarantee that this will happen.

SAVVY TIP: If you don’t make the full payments on the debts you owe, your credit file will still record you as having missed payments (whether or not you’re on a DMP). However, you can put a note (called a ‘notice of correction’ to your credit file which explains your circumstances. There’s more on how to do this in the article on credit file mistakes.

– You pay the DMP until you’ve repaid all the money you owe. If you think you’re going to miss a payment you should get in touch with your debt adviser as soon as you can.

Where are debt management plans available?
DMPs are available from two sources:

– Charities, such as StepChange, National Debtline and Citizens Advice can help you work out whether a DMP is the right option for you.

SAVVY TIP: Payplan isn’t a charity but it does offer free debt management plans.

– For profit companies: there are dozens of companies offering debt advice that you pay for. Typically, this includes a set-up fee (which may be up to the first two months’ payments) and an on-going management fee which is usually a percentage (about 15%) of the money you pay.

Individual voluntary arrangement (IVA)
An IVA is a legally binding agreement negotiated by a licensed insolvency practitioner on your behalf. They can be useful, but there’s a lot of concern that some companies push people into IVAs because of the fees they get paid.

An IVA involves:

– Getting the agreement of companies that you owe at least 75% of your debt to that you can have an IVA.

SAVVY TIP: As with the debt management plan, the professional adviser (in this case, the insolvency practitioner) will work out a budget which leaves you enough to live on and will then make an offer to your creditors. Once creditors agree to an IVA, they cannot ring or write to you anymore.

– Generally, you have to owe a minimum of £15,000 to be considered for an IVA and be fairly confident that you can spare at least £250 a month to pay off your debts for the next five years.

SAVVY TIP: If you don’t keep up payments on your IVA, you may end up being declared bankrupt. If you keep up payments your credit rating will still be poor both during the IVA and for six years afterwards.

– The terms of an IVA are less restrictive than for a bankruptcy, and while you won’t lose your home, if you have equity in your property, you will be expected to remortgage towards the end of the five years. Money raised will be split between the companies you’re in debt to.

SAVVY TIP: Here, the fees for the insolvency practitioner are paid out of the money that you pay to creditors. Be wary about being pushed towards and IVA when it’s not in your best interests.

Debt relief order (DRO)

You can use a debt relief order if you are on a low income and are not a homeowner. You can normally only qualify for one if you have less than £1,000 of assets and less than £50 a month in spare income. It costs much less than bankruptcy (as I write this in July 2016 the fee is £90). Your creditors can’t ask you to make payments towards your debts for 12 months and after that time they’re normally written off. But, like bankruptcy, a debt relief order will affect your credit rating for six years.

SAVVY TIP: You can’t be a director of a company while you have a debt relief order.

Where to get help
There are dozens of companies offering debt advice as well as several national charities. I normally recommend getting debt advice, in the first instance, from a charity such as:

1. StepChange; offers advice online or over the phone and has a debt information and advice centre.

2. National Debtline: offers telephone advice and has a wealth of factsheets and information online. There is one site for England and Wales and another for Scotland.

3. Citizens Advice: also offers face-to-face and telephone-based advice and some bureaux also offer advice by email. There’s information on its Citizens Advice website.

SAVVY TIP: You don’t have to go to a charity for debt advice; you can go to a company. But bear in mind that some will take a percentage of the money you repay, others may charge an upfront fee and many do both.

Related articles:

Tips from someone who’s been through bankruptcy

What’s on your credit file?

How to pay off your debts double quick

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