Avoiding insolvency When DMP is right choice
Summary: Avoiding insolvency - This paper explores some of the reasons why people may want to opt for a Debt Management Plan (DMP) rather than the insolvency routes of bankruptcy or an IVA.
When people can no longer meet debt repayments and they have insufficient assets to clear debts then they are technically insolvent. Their liabilities outweigh their assets or their ability to repay debts through surplus income over outgoings. In such circumstances, people often have to opt for bankruptcy or an IVA. In either case this involves a regulated Insolvency Practitioner or Official Receiver overseeing arrangements for the debtor to repay as much as they can. Personal control of finances is to some extent handed over. It can have implications for any assets owned
For some people the prospect of such a debt solution creates its own problems E.g.:
- Employment - it may be that for some in certain industries e.g. financial sector, formal insolvency will lead to real problems with employers. Bankruptcy could be a loss of job issue, and for a lesser number of people an IVA can cause serious problems with employers too.
- Business people - for Directors of limited companies, bankruptcy is not allowed (though an IVA is a possibility) and for self-employed, the problem can simply be short term. An insolvency solution is too heavy handed an option for our situation.
- Changes of circumstances - we may be facing financial difficulties now, but we can see within the foreseeable future things are going to change. An injection of income, a return to work, a reduction in outgoings may all make bankruptcy or an IVA an inappropriate debt solution.
Alternatives to insolvency
A Debt Management Plan provides an opportunity for a debtor to repay all their unsecured debts with a monthly payment that is spread between the creditors. This means the debtor can avoid a formal insolvency solution and repay their debt through a managed, structured plan. A DMP is:
- Affordable - the idea is to make one monthly payment to cover all debts based on what is affordable to the debtor. A DMP company will help the debtor calculate this payment level.
- Flexible - the plan can be ended anytime, allowing the debtor to return to contractual arrangements with their creditors anytime. They can usually vary the repayment level or inject a lump sum into the plan anytime.
- Effective - most creditors will agree to a reasonable DMP and many will agree to freeze interest or other charges, enabling the debtor to make payments off the capital owed rather than servicing the interest.