DMP, IVA or bankruptcy: what the differences actually are

Debt management plan

A DMP is an informal arrangement. You pay one monthly amount, and it is divided between your creditors in proportion to what they are owed. Nothing is legally binding on anybody.

What that means in practice. Creditors are asked, not compelled, to freeze interest and charges — many do, some do not. Any creditor can walk away and take court action at any point. You can change or stop the plan without a formal process. The plan runs until the debts are paid in full, which can take a long time, and nothing is written off.

Credit file. Accounts are usually defaulted, and defaults stay for six years from the default date.

Cost. StepChange, National Debtline and Citizens Advice all set up and run DMPs free of charge. Commercial firms charge a fee taken from your monthly payment, which means less reaches your creditors. There is no version of a DMP that a fee-charging firm can provide and a charity cannot.

Individual Voluntary Arrangement

An IVA is a formal insolvency procedure under the Insolvency Act 1986, available in England, Wales and Northern Ireland. You propose to pay what you can afford, usually over five or six years, and if creditors holding 75% by value of those who vote agree, it binds all the unsecured creditors included in it — including any who voted against. Whatever remains at the end is written off.

What that means in practice. Interest and charges stop. Included creditors cannot pursue you or take court action while you keep to the terms. In return the arrangement is rigid: payments are reviewed annually, and if you own a property you will normally be expected to try to release equity in the later stages, with the term extended by twelve months if you cannot.

Credit file and public record. Recorded for six years from approval, and listed publicly on the Individual Insolvency Register while it runs.

Cost. Nominee and supervisor fees are taken out of your contributions, not billed separately.

Failure. This is the risk people underestimate. If the arrangement fails, the original debts revive with arrears added, the fees already taken are gone, and you may be worse off than when you started.

Scotland has a protected trust deed, which is broadly comparable but works under different legislation and is registered with the Accountant in Bankruptcy.

Bankruptcy

Bankruptcy is the formal procedure most people are most frightened of, and often the one most misunderstood. You apply online in England and Wales for a fee of £680; a Scottish equivalent, sequestration, is applied for through the Accountant in Bankruptcy.

What that means in practice. It is quick — you are normally discharged after twelve months, and unsecured debts are written off at that point. If you have spare income you may be required to make payments for three years through an income payments arrangement. Assets of value, including a share of any equity in your home, can be sold to pay creditors, and your home is the reason bankruptcy is unsuitable for many homeowners.

Restrictions. It is a criminal offence to obtain credit over £500 without disclosing your bankruptcy, and you cannot act as a company director. A small number of professions — certain financial and legal roles in particular — place restrictions on bankrupt individuals, but the widespread belief that bankruptcy costs most people their job is not true.

Credit file and public record. Six years, and on the Individual Insolvency Register.

The options people are not told about

Fee-charging firms tend to present three options because those are the three they can profit from. Ask a free adviser about these as well.

• A Debt Relief Order — for people with low debts, minimal assets and little spare income. It costs nothing to apply for, and for those who qualify it is usually far better than an IVA.
• The Debt Arrangement Scheme in Scotland — a statutory scheme that freezes interest and charges while you repay in full, with no insolvency marker.
• Breathing Space in England and Wales — up to 60 days of protection from interest and enforcement while you take advice. Free, and it does not commit you to anything.
• Doing nothing formal — if debts are old, income is limited and there are no assets, a “no offer” position with token payments is sometimes the honest answer.

How to choose

The honest answer is that you cannot choose properly from a website, this one included. The decision turns on your income, whether you own property, what the debts are and how old they are, and whether your circumstances are likely to change — and it has consequences that last six years or more.

Speak to one of the free services below before committing to anything. They will look at your actual figures, they will tell you about the options that make them no money, and they cost nothing.

More guides on this site

• How to find out who holds your debt plan
• How to check a debt firm on the FCA register
• How to spot a debt advice scam

See all guides