An IVA or a DMP – What are the Differences?

The weight of debt can be crushing and overwhelming. High interest rates can create a payment cycle where the principle of your loan remains virtually untouched. This type of unsecured debt can be a trap that is very difficult to free yourself from without help. Finding a debt solution is possible. There are debt management organizations that can help you get a handle on your debt situation and work toward becoming debt free. For people who are still employed yet have large amounts of unsecured debt, there are several options. Two of these are the IVA and the DMP.

The IVA is also called an Individual Voluntary Arrangement. DMP stands for Debt Management Plan. An individual voluntary arrangement is formal as opposed to the informal debt management plan. Both debt solutions focus on eliminating debt in a more manageable manner. Both reduce multiple payments to a single, affordable monthly payment. In a debt management plan, you negotiate informally with your creditors to lower payments and change loan terms. The creditors may freeze charges or interest during an agreed upon period, but you will be required to repay the entire amount of the loan. An IVA also negotiates with creditors to lower monthly payments. All interest and charges are frozen for an IVA period of five years. At the conclusion of the five years, the remaining debt is erased completely.

In each plan, your credit rating is affected. With an individual voluntary arrangement, the IVA stays on your record for six years. A voluntary arrangement sets the debt solutions arrangement for five years to accomplish freedom from debt. Because a DMP requires that you pay the principle in full, you could be extending the life of your loan past the five year mark, but your credit record will not be affected as much long term.

While a debt management plan is informal in nature, an individual voluntary arrangement is monitored by an Insolvency Practitioner, or IP. The IVA was created in 1986 as an alternative to bankruptcy so it is the intermediate step between a debt management plan and a declaration of bankruptcy. It is a more serious undertaking than a DMP and has a more lasting effect on your credit and reputation. However, it has less stigma than a bankruptcy and less impact on your credit rating. In both the IVA and DMP, you are allowed to maintain control over your home and some assets. There are debt solutions for all situations; investigate and discover the right one for you.

Tracey Mclaren is a finance and loans expert who is currently researching the various channels of debt solutions