When you start looking for debt advice you may find yourself presented with a huge number of debt solutions, each with their own pros and cons and requirements for their use. To make things simpler we’ve put together a comparison of two debt solutions, an IVA and a DRO, so you can get a better understanding of what they entail and whether they could help your situation.
IVAs are best suited for those who can afford to make a monthly payment of at least £50 to their debts and can do this normally over five years. This is a solution that also offers the most protection from creditors as it freezes interest and charges on your debts and stops legal action from your creditors.
A DRO is a solution for those who can only afford a monthly payment of £50 or less to their debts. It writes off your debts, only requiring you to pay a small fee of , and so is a much more affordable option to bankruptcy.
Both are very different debt management solutions, with different benefits, which is why we have put together this quick breakdown on each:
| IVA | DRO | |
|---|---|---|
| Duration | An IVA typically lasts for five years, but sometimes this can be extended if payments are missed or you are unable to release equity from your property in the final year. | Like bankruptcy, a DRO lasts for a year and wipes off all debts in this time. |
| Fees | IVA fees vary for each debt management service. However, PayPlan will ensure your fees are included within your monthly repayments. | There is a fee of and you can pay this in instalments. |
| Assets | Your assets are usually protected with an IVA, which means you don’t need to sell your home or car. | You can have assets of up to £2,000 and still be eligible for a DRO. |
| Frozen charges | An IVA freezes interest and charges on all debts. | A DRO enforces a ‘moratorium’ period which means creditors cannot take action against you or enforce your debts. |
| Public register | When you take on an IVA you will be added to the insolvency register. This is accessible to the public. | DROs are also added to the insolvency register. |
| Debt write off | Usually, a large portion of debts are written off once your IVA completes then it’s up to you to continue making your agreed repayments. | Your debts are wiped and you do not have to make monthly repayments. A DRO is a preferable option to bankruptcy. |
| Creditor contact | Creditors included in your IVA are unable to take legal action against you or request payments. | Creditors included in your DRO are unable to take legal action against you or request payments. |
| Court involvement | Few IVAs need to be registered with the Court. | A DRO does not require a court approval to go ahead. |
One advantage of a DRO when compared with an IVA is that it only lasts a year – however bear in mind that it will still be flagged on your credit file for six years so will continue to impact your ability to take on credit. Debt relief orders tend to be for people who have low income however and cannot afford to repay their debts whereas IVAs are intended to help people, who can afford to make repayments, clear their debts quicker. IVA’s offer people in debt a set repayment period, frozen interest and charges and debt write off at the end of the arrangement.
How do I qualify for a DRO?
There are strict requirements for taking on a DRO:
- you have not had a DRO in the last six years.
- you must be unable to pay your debts.
- you must have debts of £30,000 or less.
- your assets must be worth less than £2,000.
- you must have £75 or less spare income after household expenses.
- you must not own a car or motorbike worth more than £2,000.
- you must live in England or Wales, or have a business registered in one of those locations.
It’s important that you meet these requirements before completing a DRO application.
It’s also important to note that you cannot take on a joint DRO with a partner. If you are both suffering with debts, you will need to considering entering a DRO each.
Debts that can be included are priority debts, such as:
- rent arrears
- utility bills
- council tax arrears and income tax
- VAT and national insurance arrears
You can also include regular credit debts on a DRO, such as:
- credit cards
- loans
- overdrafts and bank loans
- catalogue repayments
- personal and family debts
- benefit overpayments
- mortgage shortfalls
- parking penalty charges
You must include all debts that you owe on your DRO application. If you discover at a later date that you have missed any, these cannot be added later and you must continue paying them once your DRO agreement is complete.
How do I qualify for an IVA?
An IVA involves the following requirements:
- you must owe £7,000 or more to at least two or more creditors.
- you must be able to pay at least £50 a month into a repayment plan.
- you must live in England,Wales or Northern Ireland, or have a business registered in one of these locations.
An IVA can be used to cover a variety of different debt types and it is possible to add missed debts to the agreement.
Are the processes any different?
Not really, both solutions have an expert representative working alongside you – an insolvency practitioner for an IVA and an official receiver for a DRO – who deals with creditors and ensures your debt solution proceeds correctly.
It’s important that whatever solution you opt for , you work closely with your representative and notify them immediately of any changes to your situation or issues.
They are there to ensure your agreements run smoothly.
Can I take on credit during this period?
While completing a DRO you are restricted from taking on more than £500 in credit without disclosing to the lender that you are in a DRO. During an IVA you can take on new credit but it must be necessary – such as re-mortgage or a hire purchase renewal – and approved by your insolvency practitioner.
However, it will be difficult to take on more credit once you have signed up for a DRO or an IVA, simply because your credit rating will have been greatly affected.
What about my business?
If you have taken on a DRO, you are unable to act as a Company Director without permission from a court and there are certain public offices you will be restricted from holding. However, if your business isn’t a Limited Company, you may still be able to continue trading.
With an IVA, however, you can continue running your business as usual, while making your repayments.
How will my credit rating be affected?
Whether you opt for an IVA or DRO, your credit rating will be negatively impacted, resulting in a lower score and less chance of being able to obtain credit. During the agreement period for each solution obtaining credit will be difficult. However, you are able to open up new bank accounts and savings accounts.
Once these agreements are complete, however, you can start building up your score again. It’s important you start small, perhaps taking on a 0% interest credit card and making purchases that you immediately pay off at the end of the month to prove that you can be trusted with credit again.
A DRO stays on your credit report for six years from the date you entered a DRO, so this will affect your credit score for this amount of time. An IVA, is added to your credit file as soon as the agreement is approved and stays on there for 6 years.
If you have any further queries regarding DROs or IVAs then get in touch with our expert team of advisors, via phone or live chat today.
More Information on IVAs
- What is an IVA
- IVA Pros and Cons
- IVA or Debt Management Plan
- Frequently Asked Questions
- How much can be saved with an IVA?
*In the case of a one-off lump sum settlement
