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Debt management versus IVA

Escaping a debt crisis can be a painful and costly experience. Borrowers sometimes resort to extreme measures to avoid paying off debts in full, but bankruptcy and individual voluntary arrangements (IVAs) are not always the best options available to debtors. Provided below is an overview of the pros and cons of choosing between debt management and the IVA, which is becoming increasingly popular among people who are struggling to cope with a debt crisis.

In order to resolve a debt problem, the debtor must come to terms with the fact that debts are real. It is sometimes easy to think of loans, credit cards and overdrafts as intangible, inconsequential blips on the road to solvency. The ease with which some forms of credit can be obtained - not to mention the high interest rates applied to outstanding balances - is capable of breeding contempt among debtors. After all, if banks demand more and more money off the very people who bail them out in times of economic difficulty, why should debtors take their credit agreements seriously?

The answer is simply that the system penalises individuals who default on repayments. No political stand can be made by abusing credit, so the matter becomes one of personal preservation: debt problems are bad news for borrowers and must be sorted out as soon as possible if long-term damage is to be avoided. Facing up to a debt problem invariably means discussing options with creditors, some of whom will be willing to help out while others are likely to be less accommodating. When discussing matters with creditors, debtors should be prepared to consider two courses of action: managing debts in accordance with the terms specified by creditors or seeking an IVA.

The IVA was implemented in the 1980s as a means of helping debtors avoid bankruptcy. Available to people in regular employment, the IVA is best suited to those whose debts exceed £12,000. The IVA serves to create a legally binding agreement between the debtor and his creditors as to how much money can be repaid towards a debt each month. In five years, the debt is cleared and no further action can be taken against the debtor - even if he has not repaid the full outstanding balance of his debt (but providing he does not default on repayments).

In practice, the IVA provides marginally greater benefits to debtors than creditors. Often allowing the borrower to escape the full cost of a debt, the IVA acts as something of a safety net for people who might otherwise plunge into bankruptcy. The IVA, however, is by no means a perfect solution for debtors. Notice of an IVA will remain on an individual`s credit file for six years from the date of the original creditors meeting - a penalty that can seriously affect a person`s chances of securing credit in the future.

In many ways similar to an IVA, the debt management plan also aims to reach an agreement between a debtor and his creditors to secure affordable monthly repayments. Debt management plans tend to lower the amount that has to be paid to creditors each month without reducing the overall debt. It is also necessary to point out that debt management plans are not legally binding in the way that IVAs are; however, common law protection is afforded to debtors who rely on the promises of creditors to their detriment. Debt management plans are unlikely to avoid default notices appearing on credit files.

In conclusion, the IVA offers a more secure agreement between debtors and creditors, but also carries a heavy penalty in the form of the six-year credit file notice. Debt management plans tend to be less secure and more informal, but invariably inflict lighter damage on an individual`s credit rating. Debtors might also wish to consolidate debts with the aim of refinancing. A loans calculator can be used to determine whether a single monthly loan repayment is cheaper than paying multiple creditors.