Infographic: Understanding Your Debt Management Options

Learn all you need about DMPs, IVAs and Bankruptcy

When facing insurmountable debt, there are various debt management options available that individuals can utilise to get their lives back on track. It is important to be well-informed and as knowledgeable as possible about the intricacies of what is available, as knowing which alternative to opt for will save you time and facilitate a less stressful resolution.

There are various debt management solutions available, including Debt Relief Orders (DROs), Administration Orders, Debt Management Plans (DMPs), Individual Voluntary Arrangements (IVAs), and bankruptcy. Out of these options, the three most common are Debt Management Plans, Individual Voluntary Arrangements and bankruptcy.

What is a Debt Management Plan?

A DMP is an informal, non-legally binding agreement that is arranged between an individual and their creditors for paying back non-priority debts, including store cards, credit cards and loans. They are managed by a DMP provider who works directly with the creditors, meaning that you will not have to contact creditors yourself.

The DMP is organised so that you can pay back the multiple debts through one set monthly payment, with this payment being divided between your creditors. As the DMP is not legally binding, you are not tied in to a minimum period and it is possible for you to cancel at any point. DMPs may be the right route for you if you like the convenience of one simple monthly payment. Interest and charges are also usually frozen.

However, due to the informality of a DMP, it is possible that creditors may take further legal action against you. They might also choose not to cooperate or dictate changes throughout the course of the plan. In addition to this, your DMP provider might charge a fee and not all interest is always frozen by creditors. With a DMP all debt is eventually repaid, although the DMP itself, as well as any missed payments, may appear on your credit rating, affecting future credit.

What is an IVA?

An IVA is a legally binding agreement between an individual and their creditors in which debt is repaid in an affordable monthly payment for a set period of time – usually five or six years. After this period of time, the remainder of the debt is written off.

An IVA proposal must be made with a licensed Insolvency Practitioner and is usually suited for those who have unsecured debt of over £6,000 owed to more than two creditors. The benefits of an IVA are evident. They are legally binding, so no legal action can be taken by creditors without court consent, meaning they can’t circumvent IVAs with their own demands. You have the ability to safeguard certain assets, including the family home, and your credit score will be repaired once the IVA is complete.

On the other hand, if the terms of the IVA are not maintained, it may end with bankruptcy. Your credit score is affected for six years from the day the IVA starts, and the terms can be very strict. You are required to adhere to a particular budget for a long amount of time, and IVA firms have to charge certain fees.

What is Bankruptcy?

Bankruptcy is usually the last option to be considered in debt management, but might be the only method of freeing you from unmanageable debt; especially if other alternatives have proved unworkable. Bankruptcy is a formal insolvency procedure, and no minimum amount of debt is required to go bankrupt. However, bankruptcy might be denied to you as an option if you have belongings that could be used to sell to clear your debt.

Following a bankruptcy order, your debt will be written off and your creditors won’t be able to take legal action against you. You may be able to keep hold of certain household goods and have enough money to live on, but there are certain restrictions that will be imposed.

Usually, you won’t be able to get credit of more than £500 without telling the lender about your bankruptcy history. You also won’t be able to get involved with promoting, setting up or running a company without permission from a court, and you may lose your home and be banned from working in certain jobs. Your credit will also seriously be affected.

Contact Logican for a more detailed discussion about how IVA software and Debt Management Software can be of use to you and your clients.

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