What is a Debt Management Plan?
A Debt Management Plan (DMP) is an informal agreement between you and your creditors to repay your debts at a reduced monthly amount that you can afford. A DMP provider, which can be a charity or a commercial company, acts as an intermediary, collecting a single monthly payment from you and distributing it to your creditors in proportion to what you owe each of them.
Crucially, a DMP is not legally binding. Your creditors are not obliged to accept the reduced payments, and they can change their minds at any time. In practice, most creditors do cooperate with DMPs, particularly when they are arranged through reputable providers, because they recognise that receiving reduced payments is better than receiving nothing at all.
DMPs typically involve freezing or reducing interest charges, though this is at each creditor's discretion. If interest is frozen, all your payments go towards reducing the actual debt rather than just servicing interest charges. A DMP continues until all debts are repaid in full or until your circumstances change and a different arrangement becomes more appropriate.
What is an Individual Voluntary Arrangement?
An Individual Voluntary Arrangement (IVA) is a formal, legally binding agreement between you and your creditors to repay a proportion of your debts over a fixed period, usually five to six years. An IVA must be set up and supervised by a licensed insolvency practitioner, and it requires approval from creditors holding at least 75% of the value of your debts.
Once approved, an IVA is binding on all creditors, including those who voted against it. Interest and charges are frozen, and creditors cannot take further legal action against you in relation to the debts included in the IVA. At the end of the agreed term, any remaining debt included in the IVA is written off, meaning you may not have to repay the full amount you owe.
An IVA is a formal insolvency procedure and is recorded on the Individual Insolvency Register, which is a public record. It is also recorded on your credit file for six years from the date it is approved.
Key differences at a glance
- Legal status: A DMP is informal and not legally binding. An IVA is a formal insolvency procedure that is legally binding on both you and your creditors.
- Duration: A DMP has no fixed end date and continues until debts are repaid in full. An IVA typically lasts five to six years.
- Debt write-off: In a DMP, you repay the full amount owed. In an IVA, any remaining debt at the end of the term is written off.
- Interest freeze: In a DMP, interest freezing is at each creditor's discretion. In an IVA, interest is automatically frozen.
- Creditor protection: In a DMP, creditors can continue to chase you for payment. In an IVA, creditors cannot take further legal action.
- Cost: DMPs arranged through charities are free. IVAs involve insolvency practitioner fees, which are typically paid from your monthly contributions.
- Credit impact: Both affect your credit rating significantly. A DMP is recorded on your credit file for as long as it is active and for some time after. An IVA is recorded for six years from the date of approval.
- Public record: A DMP is not a public record. An IVA appears on the Individual Insolvency Register.
When a DMP is usually the better option
A DMP tends to be more suitable in the following circumstances.
Your debts are manageable with reduced payments
If reducing your monthly payments to an affordable level would allow you to repay your debts in full within a reasonable timeframe, say five to ten years, a DMP achieves this without the formality and consequences of an IVA. You repay everything you owe, which can feel important to many people.
You want flexibility
Because a DMP is informal, it can be adjusted if your circumstances change. If your income increases, you can increase your payments and clear the debts faster. If your income decreases further, the payments can be reduced. An IVA is more rigid, with a fixed monthly payment for a set term.
You want to avoid insolvency
A DMP is not an insolvency procedure. It does not appear on the Insolvency Register, and while it affects your credit rating, it carries less stigma than a formal insolvency arrangement. For some professions, an IVA can have implications for professional registration or employment, making a DMP the preferable option.
Your total debts are relatively small
For debts under £10,000 to £15,000, an IVA may not be cost-effective because the insolvency practitioner's fees represent a larger proportion of the total debt. A DMP, particularly one arranged through a free charity, involves no fees and directs all payments to debt reduction.
When an IVA is usually the better option
An IVA tends to be more suitable when the circumstances are more challenging.
Your debts are large and unmanageable
If your debts are so large that repaying them in full through a DMP would take an unreasonably long time, say more than ten years, an IVA offers a fixed end point. After five to six years, any remaining debt is written off, providing a definitive resolution.
You need legal protection from creditors
If creditors are threatening legal action, applying for CCJs, or sending bailiffs, an IVA provides immediate legal protection. Once approved, creditors cannot pursue further action in relation to the debts included in the arrangement. A DMP does not provide this protection.
Interest charges are preventing progress
If creditors in a DMP are not agreeing to freeze interest, your payments may barely cover the interest charges, meaning the debt never reduces meaningfully. An IVA freezes interest automatically and guarantees that all payments reduce the actual debt.
You want certainty
An IVA has a defined end date and a known monthly payment. You know exactly when the arrangement will finish and how much you will pay each month. A DMP is open-ended, and the timeline depends on creditor cooperation and your ability to maintain payments.
The impact on your credit rating
Both a DMP and an IVA will significantly impact your credit rating for several years. During either arrangement, obtaining new credit will be very difficult, and the record will remain on your credit file for a substantial period after the arrangement ends.
With a DMP, the credit impact is slightly less severe because it is not a formal insolvency procedure. However, the late and reduced payments recorded during the DMP will affect your credit file for six years from each recorded event. If the DMP runs for five years, the credit impact extends well beyond the end of the arrangement.
With an IVA, the entry on your credit file is removed six years after the date of approval, regardless of when the IVA actually completes. This can mean that the credit impact clears sooner than a long-running DMP, which is a counterintuitive advantage of the more formal arrangement.
Getting the right advice
The choice between a DMP and an IVA should be based on a thorough assessment of your complete financial situation by a qualified debt adviser. Free, impartial advice is available from StepChange Debt Charity, Citizens Advice, National Debtline, and MoneyHelper. These organisations will assess your circumstances and recommend the most appropriate solution without any commercial bias.
If you are a homeowner and want to explore whether a debt consolidation mortgage might be a more effective solution than either a DMP or an IVA, Nesto can match you with an FCA-regulated broker to assess your options. The service is free with no obligation. Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on your mortgage.