How to recommend the right debt management option: IVA, DMP or bankruptcy?

Regardless of whether you’re an Insolvency Practitioner, you run your own debt management business or you manage an insolvency firm, you will have a number of clients with individual, unique cases. To ensure efficiency, you will be looking for reliable and timely ways of deciding which debt management option to recommend to your clients.

Professionals often utilise insolvency software to calculate the best debt management option for their clients. Software such as LogiDebt is designed to centrally store and track client incomings, outgoings, assets and dependents. This software then cross-references this data with the appropriate lenders and uses Best Advice Model (BAM) to recommend the best possible route for the clients in question.

It is natural for clients to have a million questions regarding alternative debt management options and to query whether another might be more suited. Below are the differences between the existing debt management options, as well as information that can help clients understand why you have recommended the measure at hand. This document will explore the three most popular solutions to debt management: IVAs, DMPs and Bankruptcy.

Is an Individual Voluntary Arrangement (IVA) right for your client?

An IVA is a formal, legally binding agreement between an individual and their creditors. Using an IVA, a reasonable percentage of your client’s debts can be repaid over a set time of approximately six years. Upon completion of the IVA, any remaining debt is written off and your client’s IVA will be removed from their credit report. An IVA must be filed with the help of a qualified Insolvency Practitioner. Clients seeking an Insolvency Practitioner can either approach one themselves or be referred through a debt advisor.

With an IVA, there is no need for your client to have further contact with their creditors. Instead, the Insolvency Practitioner will meet with the client’s’ creditors to consider the proposal. Without the agreement the creditors, the IVA will be unable to proceed. However, if the IVA proposal gets rejected, it is entirely possible for your client to address the creditors’ concerns and resubmit for consideration. Once your client is accepted for an IVA, their debts will be frozen and they will repay their creditors in one monthly repayment.

An IVA’s restrictions are generally more flexible than a bankruptcy. Your client will more than likely be able to keep their house and their car, and they will have a set amount of money to live off each month. An IVA will be suitable for your client if they live in England, Wales or Northern Ireland and they are technically insolvent. This essentially means that they can afford to pay a proportion of their debts but not the full amount. Your client needs to be in debt to more than one creditor and will need to have a monthly disposable income. Though circumstances vary, it is generally accepted that your creditor debts should be in excess of £15,000.

Is bankruptcy right for your client?

A bankruptcy order can be brought against your client by any lender who is owed more than £750. Your client can also take a bankruptcy order out against him or herself. A government official known as the Official Receiver will be in touch regarding your client’s current financial situation and what assets they might be able to sell to repay their debts. With a bankruptcy, your client will be subject to very restrictive terms that they must adhere to; it’s not an easy route or a simple way of writing off debt.

There are a number of ways to determine whether or not a bankruptcy is appropriate for your client’s current circumstances. Question whether your client can see any feasible way to repay their debts otherwise. Do they have any possessions of sufficient value that could be used to repay their creditors? Can your client see their situation improving in the near future?

There isn’t a minimum amount of debt to make your client eligible for bankruptcy, but before pressing ahead with a bankruptcy it is important to know the long-term implications. It will be difficult to secure any loans for a number of years, and if your client is the sole director of a limited company, the Official Receiver will have to liquidate their company. Generally, those who go bankrupt do so because they have no other alternative.

Is a Debt Management Plan (DMP) right for your client?

A DMP is another alternative to bankruptcy that can be set up with the assistance of a qualified debt advisor. In essence, a DMP is an informal, non-legally binding agreement between an individual and their creditors to repay outstanding debts in monthly installments. It is likely that your client’s  debts will be frozen during this time, meaning that they will be more able to repay their debts in a shorter amount of time. The informal nature of a DMP adds an element of risk that doesn’t exist with an IVA, as creditors might decide to change the terms of the agreement at any point or back out altogether.

A DMP might be right for your client if they owe more than £7,000 in unsecured debts (including credit cards, store cards, loans and overdrafts) and your client is failing to make the requisite repayments. Unlike with an IVA, all debt will ultimately be repaid to their creditors, but your client will have a very firm handle over your assets. Your client will be under no legal obligation to release equitable interests over to their lenders. If your client’s debt far exceeds £7,000, it might be wise to pick an alternative debt management solution, as the time it will take to repay the debt might be excessive.

Logican’s debt management software, LogiDebt, offers a number of personalised facets and features that make it a wise and efficient choice for anyone looking for gold-standard IVA software.

Reach out

Want to process more claims, more profitably?

Book free LogiClaim demo