What is the difference between a debt management plan, an IVA and bankruptcy?
Three responses to unmanageable debt, differing in whether they are legally binding, whether debt is written off, and what they cost you.
Debt management plan (DMP). An informal arrangement to pay creditors a reduced monthly amount, usually administered by a debt charity or a commercial provider.
Informal means not binding. Creditors are asked to accept reduced payments and to freeze interest and charges, and most do — but they are not obliged to, may continue adding interest, and may still take action. You repay the full debt, over a longer period, so it can take many years.
No public record, though the reduced payments appear on your credit file. Free providers exist, and paying a commercial provider for this is rarely worthwhile.
Individual voluntary arrangement (IVA). A formal, legally binding agreement supervised by an insolvency practitioner, typically over five to six years.
If creditors holding 75% by value of those voting approve it, all unsecured creditors are bound — including those who objected. At the end, remaining qualifying debt is written off.
The costs: the practitioner's fees come out of your payments; it appears on the Individual Insolvency Register and your credit file for six years; and failure is common, with a substantial proportion terminating early, leaving you with the original debt plus the time lost.
Restrictions apply, including on further borrowing.
Bankruptcy. A formal insolvency procedure, applied for online for a fee or obtained by a creditor.
Assets vest in a trustee and may be sold — including, potentially, your home, though there are protections and time limits. Usually discharged after twelve months, with remaining qualifying debts written off.
An income payments arrangement may require contributions from surplus income for up to three years after discharge.
Restrictions during bankruptcy affect acting as a company director and certain professions.
Also worth knowing: a Debt Relief Order, for people with low income, minimal assets and debt below a threshold — cheaper and simpler than bankruptcy.
Take free advice first, from a charity rather than a commercial provider, since the right option depends entirely on your circumstances.
General information, not financial advice.