Is an Individual Voluntary Arrangement a Superior Debt Solution?
Many people who are struggling with financial issues such as credit card debt, unsecured loans, and high APR personal overdrafts are turning to debt management plans. However, a debt management plan isn’t a debt solution that is suitable for all situations. Does an Individual Voluntary Arrangement provide a more viable debt solution for dealing with serious debts?
What is a Debt Management Plan?
A debt management plan is a voluntary agreement between a debtor and his creditors. A minimum of £100 must be contributed each month towards the agreement. Credit card debt and unsecured loans are all grouped together meaning that personal finances are greatly simplified for the borrower.
It minimises the risk of creditor harassment as the appointed private company distributes money to creditors on a pro rata basis. A debt management plan often results in further interest and charges being frozen which can help reduce the overall debt burden. However, most companies offering debt management plans charge about 15% for their services.
The average charge for administering a debt management plan is 15%. This means that only £85 from every £100 paid into this debt solution actually go to creditors. This often means that it can take in excess of a decade to clear any bad debts.
No Debt Write-off with a Debt Management Plan
A debt management plan doesn’t result in any reduction in personal debt, although it can mean that further interest and charges are frozen. This means that this debt solution requires a debtor to pay back every penny borrowed which can take many years at the reduced rates. There are many instances where the level of debt actually increases when interest and charges aren’t frozen.
Debt Management Plans vs. Individual Voluntary Arrangements — Debts over £15,000
A debt management plan is excellent for dealing with smaller personal debts. However, due to the low amounts generally paid into a debt management plan and the relatively high management charges, it can mean that this debt solution isn’t appropriate for those dealing with serious debts of over £15,000.
An Individual Voluntary Arrangement or IVA is a legally binding agreement. Once a debtor has made 60 monthly repayments to the appointed Insolvency Practitioner, the remaining debts are written-off. In certain circumstances, up to 75% of personal debt is eliminated which makes it a viable alternative to both a debt management plan and personal bankruptcy.
A debt management plan provides an extremely viable debt solution for those with more modest levels of debt. However, those with serious debt who wish to eliminate financial difficulties in a defined term should consider an Individual Voluntary Arrangement or personal bankruptcy.