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Debt Relief Order or IVA – Which is Best for Me

It’s natural to be overwhelmed if you’re just getting started with debt solutions. Unless you’re an expert, sorting out the distinctions between each debt solution and selecting which is the best option for you may be difficult.

Many people ask us if an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO) is the best option for them. With this in mind, we’ve chosen to compare the two debt management strategies so that you can understand the distinctions and determine which one is appropriate for you.

What is a Debt Relief Order?

Debt Relief Orders, or DROs for short, is a type of insolvency procedure that can help you clear your debts if you owe less than £30,000, have little to no spare income, assets of less than £2,000 and a vehicle worth less than £2,000 and not be a home owner.

A DRO is a formal insolvency process and will appear on your credit file for six years, which may make it difficult to obtain credit during that time. The cost of applying for a DRO is £90 which can be paid in one lump sum or in instalments.

Once you have been granted a DRO, your creditors are legally obliged to freeze all interest and charges on your debts, and they cannot take any further action against you.

If you successfully complete the terms of your DRO, your outstanding debts will be written off after a year.

You will be discharged from your DRO 12 months after it is granted, at which point your unsecured debts will be written off and you will no longer be liable for them.

What is an IVA?

Individual Voluntary Arrangements are a debt solution available to individuals in the UK who are struggling with unmanageable levels of debt.

An IVA is a legally binding agreement between you and your creditors that specifies how much you will pay back each month, over a fixed period of time (usually five years but can be 6 years if you are a home owner).

This monthly payment is usually a lot less than the total amount you owe, and any remaining unsecured debt is written off at the end of the IVA period. This means that an IVA can provide significant relief from your debts, and help you get back on track financially.

To be eligible for an IVA, you need to have at least 2 or more unsecured debts and owe at least £7,000 or more and have a left over income of at least £100 per month after accounting for bills and living costs.

Like a DRO, details of the IVA will appear on your credit file for six years from when it is approved.

IVAs and DROs – The Pros and Cons

Both are types of formal insolvency that are designed to help you become debt free over a period of time.

We will now take a look at the main pros and cons of each option which combined with your own personal circumstances will assist you in determining which may be the best debt solution for you:

IVA Advantages

  • You only make one affordable monthly payment
  • interest and charges will be frozen during the term and the outstanding balances written off once your IVA completes
  • Your creditors will not be able to contact you
  • There are no up front fees to pay in setting up an IVA
  • Home owners are eligible for an IVA with your asset normally protected
  • There is flexibility during the IVA so that if your circumstances change, your IP can reassess your situation and contact your creditors to seek changes
  • The costs of an IVA are agreed with your creditors and are drawn from your affordable monthly payments

IVA Disadvantages

  • If you stop making payments, the IVA could fail and you will have to start dealing directly with your creditors again
  • Your credit rating will be damaged for 6 years and you will be unable to apply for any significant credit whilst in an IVA
  • Details of the IVA will be recorded on the Insolvency Register until 3 months after it has completed
  • An IVA cannot include any court fines you may owe or any secured loans

DRO Advantages

  • For the next 12 month duration of a DRO, all debts and interest will be halted and creditors will not be able to contact you directly
  • If your financial situation is the same at the end of the 12 months, your debts will be written off
  • Debt Relief Orders are a cheaper alternative to Bankruptcy if you qualify by owing less than £30,000, a disposable income of less than £75 and assets of less than £2,000

DRO Disadvantages

  • If you fail to cooperate with the debt advisor during the year, your DRO could be revoked leaving you to deal directly with your creditors again
  • You’ll be committing an offence if you attempt to take out credit of over £500
  • Your credit rating will be damaged for 6 years – until the record of the DRO is wiped from your credit record
  • Details of the DRO will be recorded on the public Insolvency register and it will also affect your credit rating for 6 years making credit difficult to obtain even after the initial 12 months
  • There is an up front fee of £90 to process the application which is not refundable in the event that the Debt Relief Order is no granted
  • Debt Relief Orders cannot include any court fines you may owe

Comparing an IVA with a Debt Relief Order (DRO)

It’s important to understand that whether an IVA or a DRO is best for you will be determined by your financial circumstances — both debt solutions are intended for varying situations and levels of disposable income. Some common questions we are asked by our clients when discussing their situations are as follows:

Do I have to get in touch with the creditors I owe?

No. Your creditors will not be permitted to contact you during the one year of the DRO or the full duration of your IVA. They must only communicate with your Insolvency Practitioner (IP) if they want to speak about the debt.

Will my credit score be affected?

Yes, both solutions will be recorded on your credit report for a total of six years and your credit score will likely remain poor, particularly in the first few years.

A DRO will remain in effect for 12 months after which, you can attempt to rebuild your credit score and rating. However, details of the DRO will remain on your credit report for a further 5 years after completion and credit will therefore likely remain difficult to obtain.

Although an IVA will be recorded on your credit report for six years, this includes the five years the IVA is in effect so in reality, it only remains on your credit report for a further 12 months after completion

What happens if I missed debts off?

In a DRO, it is very important that you do not miss any of your debts off when applying. Once a DRO is approved, you cannot add debts later. Instead, you’ll have to make separate arrangements to pay them off

In the unlikely event that you forget to add a debt to an IVA, as long as your IVA is still active at the time the debt comes to light, it is possible for your IP to add the debt to the IVA as long as it existed before the IVA was approved. In some instances, this may mean seeking creditor consent for the debt to be added if it is a large amount.

Is an IVA or a DRO right for me

An IP is fully qualified and licensed by their regulatory body to assist in providing debt advice and can prepare the legal paperwork in place to set up a DRO or an IVA.

Whether you’re thinking about an Individual Voluntary Arrangement (IVA) or a Debt Relief Order (DRO), you’ll need expert debt advice and assistance from an Insolvency Practitioner to make the best decision.

An IP will help you choose the solution that’s right for you depending on your financial circumstances They will look at how much disposable income you have free, debt that you owe and what assets you own

At Become Debt Free, we can discuss your individual circumstances with you and assist you in choosing the best solution for your needs.

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Customers can get free debt advice from the Money Advice Service – an organisation set up by the Government to offer free and impartial advice to those in debt. For more information from the Money Advice Service visit www.moneyadviceservice.org.uk. MAS is part of the Money & Pensions Service. We are not affiliated with MAS in any way.

Become Debt Free is a trading style of Re10 (Finance) Limited Registered Number 04651137.  Data Protection Act Registration Number – Z8613095

Become Debt Free specialise in providing and administering Individual Voluntary Arrangement (“IVA”) solutions to individuals based in England, Wales and Northern Ireland.  We do not administer Debt Management Plans, Debt Relief Orders, or any other debt solutions.  We only provide advice after completing or receiving an initial fact find where the individual(s) concerned meets the criteria for an IVA, therefore, all advice is given in reasonable contemplation of an insolvency appointment.

* To qualify for debt write off in an IVA with us, you must have a minimum of £7,000 of qualifying unsecured debt owed to two or more creditors.  The amount of debt write off is based on your own personal circumstances – typically this could be up to 85% of what you owe; and this has been achieved by over 10% of our customers who have successfully completed their IVA’s in the last 12 months.  The amount of debt write off differs for each customer and is dependent upon their individual financial circumstances and subject to the approval of their creditors.

Andrew Bowers is authorised in the UK to act as Insolvency Practitioner by the Insolvency Practitioners Association.

 

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