When you are struggling with debt, it can be difficult to know where to begin. There are several debt solutions available in the UK, but they do not all work in the same way.
The right option will depend on factors such as your income, expenses, debts, assets, and individual circumstances. Understanding the main differences can help you feel more informed before exploring the debt solutions that may be available to you.
What Is a Debt Management Plan?
A Debt Management Plan, commonly known as a DMP, is an informal arrangement that allows you to repay eligible debts through one affordable monthly payment.
Your payment is divided between your creditors. In some cases, creditors may agree to freeze interest and charges, although they are not legally required to do so.
A DMP may be considered if you can afford to make regular payments but are struggling to maintain the amounts originally agreed with your creditors.
Things to consider
- It may take longer to repay your debts.
- Creditors can still take further action because a DMP does not provide guaranteed legal protection.
- It may negatively affect your credit rating.
- Priority bills such as rent, council tax, and utilities are not normally included.
- Some debt management providers may charge fees, although free services are available.
What Is an Individual Voluntary Arrangement?
An Individual Voluntary Arrangement, or IVA, is a formal and legally binding agreement between you and your creditors.
You usually make an affordable monthly payment for a fixed period, commonly five or six years. If the IVA is successfully completed, qualifying debt remaining at the end of the arrangement may be written off.
An IVA may provide protection from further legal action by the creditors included in the arrangement. Interest and charges are also normally frozen once the IVA has been approved.
Things to consider
- An IVA involves fees.
- It will negatively affect your credit rating.
- Your details will appear on a public insolvency register.
- Creditors must approve the proposed arrangement.
- Homeowners may need to address any available equity in their property.
- If the IVA fails, creditors may resume recovery action and could petition for bankruptcy.
An IVA is not suitable for everyone. Its benefits, risks and alternatives should be carefully considered before making a decision.
What Is a Debt Relief Order?
A Debt Relief Order, or DRO, is a formal insolvency solution designed for people with a relatively low income, limited assets and debts within the qualifying limit.
During the DRO period, payments are generally not required towards the debts included. If your financial circumstances have not improved by the end of the period, the qualifying debts are normally written off.
Strict eligibility requirements apply, including limits relating to your total debt, disposable income, and the value of your assets. DROs are available in England, Wales and Northern Ireland, although different limits and rules may apply in Northern Ireland.
Things to consider
- A DRO will negatively affect your credit rating.
- Your details will appear on a public insolvency register.
- It may affect certain jobs or professional positions.
- Your DRO could be cancelled if your circumstances improve, and you no longer meet the qualifying criteria.
- Not every type of debt can be included.
What Is Bankruptcy?
Bankruptcy is a formal insolvency procedure that may be considered when someone is unable to repay their debts.
Once a bankruptcy order has been made, creditors included in the bankruptcy are generally prevented from taking further action against you. Qualifying debts may be written off when you are discharged from bankruptcy.
Things to consider
- Valuable assets, including your home in some circumstances, could be sold.
- You may be required to make payments from your income for a set period.
- Bankruptcy will negatively affect your credit rating.
- Your details will be added to a public insolvency register.
- Certain jobs, businesses, and professional responsibilities may be affected.
- An application fee applies.
Bankruptcy can provide a route out of serious financial difficulty, but it can also have significant and long-lasting consequences.
Which Debt Solution Could Be Right for You?
There is no single debt solution that is right for everyone.
Two people with similar levels of debt may require completely different solutions because of differences in their income, household expenses, assets, location, and personal priorities.
Before making a decision, it is important to consider your complete financial situation, not only the total amount you owe. Revolution Money’s Online Debt Journey can help you understand which options may be available based on the information you provide.
Take the First Step Today
You do not have to understand every debt solution before asking for help. The important thing is to take the first step and find out which options may be suitable for your individual circumstances.
Start your Online Debt Journey today and take the first step towards understanding your debt-solution options.