How do you know whether an IVA, DMP or bankruptcy is right for you? Ask yourself these crucial questions
Debt can be a difficult thing to navigate. With so many people remaining tight-lipped about money and credit, a lot of us are uninformed as to our debt management solutions. This is unfortunate, as many debt management options are available and no two are alike and, depending on your own particular circumstances, one might be far better suited to you than another.
How do you know which debt management solution is best for you and your needs? Seeking the advice of a debt management professional or an Insolvency Practitioner is the best course of action going forward. These professionals use advanced debt management software such as LogiDebt to determine which solution best fits your needs, whether it be an Individual Voluntary Arrangement (IVA), Debt Management Plan (DMP), or bankruptcy.
Before you press ahead, though, you might want to do your own homework in order to find out which debt management solution is right for you. To begin with, answer the following questions to get an accurate vision of where you are financially.
1. Do you want a formal or informal agreement?
This is one of the most important factors that will determine which debt management solution you should choose. DMPs are informal, which poses both pros and cons. You are not tied to a minimum period, and you are able to cancel at any point, meaning it is far more flexible. However, this flexible nature not only benefits you – it also works in your creditors’ favour. At any point, your creditors might decide to take further legal action against you. They might also decide not to co-operate or change the terms of the plan.
An IVA, however, is a formal agreement between you and your creditors. As such, once an IVA is in place, no further legal action can be taken against you without the court’s consent. In this respect, you are guaranteed more stability and security. However, your creditors will be able to place relatively strict terms on the IVA, which you will have to adhere to for the remainder of the IVA, which lasts approximately six years.
Bankruptcy is a formal agreement. Your creditors don’t have to agree to a bankruptcy, and it usually absolves you of your remaining debt, but at a cost of restrictions that are far stricter than those experienced with an IVA.
2. How long do you want your debt management solution to last?
An IVA will last for six years, during which time you will be unlikely to secure any loans as creditors will consider you a risk. However, once your IVA is complete, the IVA itself is wiped from your credit report, meaning that you can begin to rebuild credit.
Due to its informal nature, it is difficult to say how long a DMP will last, but the average length of time is just over five years. It should be noted that the average person pays back approximately £18,500. Given this, if you owe less, you could complete your DMP in a much shorter time.
The average bankruptcy lasts for one year. However, the impact on your credit rating will remain for a further five years. A bankruptcy is a serious course of action, and it should only really be considered in dire circumstances. A bankruptcy will impact everything from the type of job you can have to whether or not you will be able to secure a mortgage.
3. What is the extent of your debt?
The minimum debt level for an IVA will vary depending on your IVA provider. However, you generally need to have a minimum debt level of £5,000 owed to two or more creditors.
There is no strict minimum or maximum debt level in place to qualify you for a DMP. However, before you opt for a DMP you should decide whether or not you would be able to pay off your debt with your current disposable income within six months. If so, you should reconsider the need for a DMP. In addition, if you have a very high amount of debt, a DMP might not be for you, as it could simply take far too long. After all, with a DMP, the total amount of debt is repaid, unlike an IVA.
For a creditor to make you bankrupt, you must owe at least £5,000. However, there is no minimum amount stated for you to owe to declare yourself bankrupt. With a bankruptcy, the money you owe can usually be written off, your credit rating will suffer for six years, you might be asked to sell your home, and certain valuable possessions will also have to be sold to cover part of your debt.
4. Are you currently employed?
Before you opt for an IVA, take into consideration your current employment status. If you aren’t in gainful employment but subsisting off state benefit, it is highly unlikely that you will be successful in applying for an IVA.
Due to the fact that a DMP is informal, and at any point your creditors can decide to not press ahead, there is more of a chance that you will be successful with a DMP if you are unemployed. If your unemployment appears to be only temporary, then your creditors might be happy to agree to a DMP, especially if they are satisfied that you can afford regular repayments. If, on the other hand, it is unlikely that you will be able to afford any repayments, then a bankruptcy might be right for you. You don’t need to be employed to declare bankruptcy.
