If you are experiencing serious debt problems, if your monthly outgoings regularly exceed your income, and you have "maxed out" all possible lines of credit on credit cards, personal loans, etc., it may well be that a debt management plan of one type or another could be beneficial to your financial and physical health. An informal debt management plan or a formal legally binding IVA, or "Individual Voluntary Agreement", may be appropriate according to your exact financial circumstances and the severity of your debt. In either case, taking pro-active steps towards tackling your debt may not only improve your chances of becoming debt-free in a relatively short period of time, but also only lessen the harmful side effects associated with debt e.g. stress, anxiety, depression, etc. IVA Versus Debt Management Plan The IVA was introduced by the Insolvency Act, 1986, as an alternative to bankruptcy in England and Wales, which was similar but not identical to the "Protected Trust Deed" existent in Scotland. It is available, with certain caveats, to all individuals, sole traders, and partners. An IVA is less restrictive than bankruptcy as any property owned by the debtor, for example, is not at risk, but is, nevertheless, a legally binding contract between a debtor and his or her creditors.
To be eligible for an IVA, you must be over 18 years of age, employed, and indebted to at least three separate creditors for a sum of £15,000. In addition, the term of an IVA, typically 5 years, cannot extend beyond statutory retirement age. The legislation surrounding an IVA is similar to that surrounding bankruptcy, and a Licensed Insolvency Practitioner mustt draw up an Agreement, itself. An IVA does, however, allow any further interest and other charges on your debt to be "frozen", and monthly repayments are based on what you can comfortably afford to repay, taking into account your essential outgoings. Likewise, all creditor contact, legal, or collection action ceases for the duration of the Agreement. A recent change to the Consumer Credit Act, which requires information regarding outstanding balances, charges, etc. to be sent to debtors involved in an IVA, has created confusion, but is for information purposes only and does not affect the Agreement in any way.
The creditors representing at least 75% of the value of your debt must approve an IVA, your home may still be at risk if your creditors decide not to exclude it from the Agreement and you may still face bankruptcy if you fail to meet your obligations under the terms of the Agreement. If your level of debt is less than £15,000, an informal debt management plan (informal in the sense that it is not legally binding, on either side) may provide a more flexible solution to your debt problems. It may be particularly suitable if you have cash flow problems in the short term and have a realistic expectation of an improvement in your financial circumstances in the near future. You can, of course, negotiate with your creditors directly, but if you require assistance in doing so, you can turn to one of the charitable debt agencies, such as the Citizens' Advice Bureau, or National Debtline, or any number of fee-charging agencies. Whichever way you approach a debt management plan, your creditors will typically be offered an SOA, or "Statement of Affairs", which outlines your disposable income and how you intend to distribute it amongst your creditors.
If your plan is accepted, you can make a single monthly repayment, which is distributed pro rata by your debt management company, which also deals with any correspondence from your creditors. A debt management plan does offer flexibility, insofar that if your situation improves you can increase your monthly repayment, and vice versa. Bear in mind that interest may continue to be added to your debt, significantly increasing the length of time that you are in debt. Furthermore, a debt management plan is informal, which means that there is nothing to stop a creditor reneging on the agreement and demanding the full monthly repayment, as per the original credit agreement, at any time. The informality of a debt management plan does not, however, prevent it from being viewed favourably by your future creditors because it demonstrates your commitment to deal responsibly with your debt. A debt management plan typically requires no contract and you are free to make alternative arrangements if you are unhappy with any plan. Debt management companies do, nevertheless, require a Consumer Credit Licence issued by the OFT ("Office of Fair Trading").