If you are struggling to deal with debts, it is likely that you have looked at various options and have become confused by what each has to offer. If you are talking to someone about a plan to manage your debts, it is vital that you understand what you are getting into.
Here we look at two of the most common terms you will come across, what exactly they are and the difference between them.
Debt management plan
You may have been offered a debt management plan (DMP), which is an informal agreement between you and the people to whom you owe money. DMPs are used when you are able to pay back a small sum each month or when you have a temporary problem that means you will be able to pay at a later date.
The debt still needs to be repaid in full and the agreement will last until all the money is paid off. While interest rates and repayment rates may be frozen for the term of the agreement, this is not guaranteed.
Individual voluntary arrangement
An individual voluntary arrangement is similar to a DMP; however, there are some key differences, which can make it a better choice for many people. Firstly, it is a legally binding agreement and ensures that all charges and interest rates are frozen.
Rather than dealing directly with the people to whom you owe money, you use a third party called an insolvency practitioner. The big difference here is that once the agreement is in place, it stops your creditors – the people you owe money to – taking legal action against you to recover the debt.
For this type of agreement, an advisor will sit down with you and work out how much you can afford to pay. You will have to provide details of all your debts and income.
The practitioner will then contact all your creditors and propose a payment scheme. If 75 per cent of the creditors agree to this, it will come into force and will also apply to any that did not agree. The agreement will usually last for 60 monthly payments, although this can be different in some circumstances. Once you have completed the payments, any remaining debt is written off.