Navigating through a sea of debt can be a daunting experience. The thought of meeting repayment obligations, while trying to manage everyday living costs, is overwhelming for many. Fortunately, you don’t have to sail these turbulent waters alone. In the UK, various mechanisms have been established to help individuals get their financial affairs back on track to help against creditors who you owe money to. Among these, two stand out: the Debt Relief Order (DRO) and the Individual Voluntary Arrangement (IVA).
The DRO and IVA are debt solution tools designed to provide much-needed relief for individuals struggling with overwhelming unsecured debts. However, each tool has its unique characteristics, pros and cons and they suit different circumstances. Understanding these can be key to determining the most appropriate route towards financial solvency for your particular situation.
In this article, we will delve into what DRO and IVA entail, compare the two options, discuss the pros and cons of both the IVA and DRO, and address common queries about them. Our aim is to give you the insight you need to make an informed decision about your financial future.
Remember, while the journey to debt recovery may seem arduous, there’s always a way forward. Read on to explore which of these paths – DRO or IVA – might be the best one for you.
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Understanding Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a formal debt solution intended for individuals with little disposable income, minimal assets, and relatively small debt levels. Introduced in 2009, the DRO is designed to provide debt relief orders for individuals who find it virtually impossible to repay their debts.
To qualify for a DRO, there are several requirements. Firstly, your total unsecured debt must not exceed £30,000. Secondly, your disposable income after normal household expenses must be £100 or less per month. Finally, you must not own assets worth more than £3,000 .
If a DRO is approved, your debt is frozen for a period of 12 months. During this time, creditors are not allowed to pursue you for repayment of missed debts. If your financial circumstances haven’t improved by the end of this period, the debts included in the DRO are written off.
However, it’s crucial to understand that a DRO is not without drawbacks. While it offers a relatively quick path to debt resolution, it has significant implications, particularly concerning your credit score. Also, not all types of debt are eligible for inclusion in a DRO.
Let’s explore these pros and cons in more detail.
DRO: Pros and Cons
A Debt Relief Order (DRO) offers a route for individuals grappling with debt, yet it too comes with its own set of advantages and disadvantages.
Pros of a DRO:
- Debt Write-off: After the DRO period (typically 12 months), your debts included in the DRO are written off.
- No Repayment: Unlike an IVA, you make no payments towards your debts.
- Legal Protection: Like an IVA, creditors cannot take further action against you once the DRO is in place.
- Affordable Application Fee: The cost of applying for a DRO is significantly less than the cost of declaring bankruptcy.
- Limited Impact Duration: A DRO stays on your credit file for six years but the active duration is only 12 months.
Cons of a DRO:
- Limited Eligibility: You can only apply for a DRO if you owe less than £20,000, do not own your home, and have very little spare income.
- Credit Rating Impact: Similar to an IVA, a DRO will stay on your credit file for six years, which can make obtaining credit more difficult.
- Restrictions on Spending and Debt: You’re not allowed to take on more debt of £500 or more without telling the lender about your DRO, and there are restrictions on your spending.
- Public Record: Your DRO is listed on a public register, the Individual Insolvency Register.
- Access to Certain Jobs: A DRO may affect your ability to work in certain roles or professions.
Both IVA and DRO debt solutions will have their unique merits and drawbacks. The optimal choice hinges on your specific financial circumstances, debt levels, and future aspirations. It’s advised that you consult with a debt advisor before making your decision.
Understanding Individual Voluntary Arrangements (IVA)
In contrast, an Individual Voluntary Arrangement (IVA) is a formal legally binding agreement between you and your creditors to repay a portion of your debts over a set period, typically five or six years. Unlike a DRO, an IVA is more suitable for individuals who have larger amounts of debt and some form of regular income that can be utilised to make repayments.
An IVA requires you to make regular payments to an insolvency practitioner, who then distributes these payments among your creditors. The amount you pay is based on what you can reasonably afford after essential living costs. Once monthly payments for the agreed period ends, any remaining debt is written off.
To be eligible for an IVA, there’s no defined maximum debt limit, but as a general rule, it’s typically used by individuals with unsecured debts greater than £7,000. You’ll also need to demonstrate that you have a regular income and the capacity to make the monthly repayments required under the IVA.
Similar to a DRO, an IVA can have serious implications for your financial future, impacting your credit score and limiting your access to further credit. It also requires a high level of commitment, if an IVA fails it can result in serious consequences, such as bankruptcy.
In an Individual Voluntary Arrangement (IVA), various types of unsecured debts can typically be included. Here are some examples of debts that can be included in an IVA:
- Credit card debt
- Personal loans
- Overdrafts
- Store cards
- Catalogue debts
- Payday loans
- Utility bill arrears (gas, electricity, water)
- Council tax arrears
- HM Revenue & Customs (HMRC) debts (e.g., income tax, self-assessment tax)
Here are some examples of debts that generally cannot be included in an Individual Voluntary Arrangement (IVA):
- Student loans
- Court fines and penalties
- Child maintenance or child support payments
- Secured debts, such as mortgage or hire purchase agreements
- Debts incurred after the start of the IVA
- Social fund loans or crisis loans
- Personal injury compensation claims
- Certain tax debts, such as VAT or PAYE
- Debts arising from fraudulent activity or criminal fines
Let’s delve deeper into the pros and cons of an IVA.
IVA: Pros and Cons
Now, understanding the benefits and drawbacks of an Individual Voluntary Arrangement (IVA) is crucial before deciding if it’s the right course of action for you.
Pros of an IVA:
- Debt Write-off: After the agreed repayment period (usually five to six years), any remaining debt is written off.
- Legal Protection: Once an IVA is in place, creditors cannot take further action against you. It is a legally binding debt solution.
- Affordable Monthly Payment: You only pay back what you can afford after household bills.
- One Monthly Payment: All your unsecured debts are consolidated into one monthly payment.
- Interest and Charges Frozen: From the day your IVA is approved, no further interest or charges can be added to your debts.
Cons of an IVA:
- Credit Rating Impact: An IVA will stay on your file from the credit reference agency for six years from the date it starts, which can make obtaining credit more difficult.
- Long Term Commitment: You are required to stick to the financial agreement for the duration of the IVA, usually five or six years.
- Equity Release: If you are a homeowner, you may be required to release equity from your home to pay into the IVA.
- Public Record: Your IVA is listed on a public register, the Individual Insolvency Register.
- Strict Budgeting Required: You must adhere to a tight budget, as failing to meet your repayments could lead to bankruptcy.
- Secured loans: Secured loans cannot be added to the IVA.
The decision between a DRO and an IVA can depend on numerous factors, including your total debt, your regular income, and your long-term financial goals.
The Aftermath of DRO and IVA
Understanding the repercussions of your decision and what to expect once the IVA or DRO is completed is crucial.
After 12 months of DRO
Once you’ve been under a DRO for 12 months and assuming your financial situation has not improved, all of the debts listed in the DRO will be written off. However, as mentioned previously, the DRO will remain on your file for six years, which may hinder your ability to obtain credit during this period. Despite this, many people find that their credit score starts to improve a few years after the DRO has been discharged.
Post IVA
Upon successful completion of an IVA, the remaining debt is written off. You’ll receive a completion certificate usually within six weeks. The IVA will stay on your file for six years from the start date, meaning it could be on your file for a year or so after completion if your IVA lasted five years. Just like with a DRO, rebuilding credit post-IVA is possible but it requires responsible financial management.
No matter which route you take, an essential part of the journey is learning how to manage your money effectively. It’s beneficial to seek advice from financial counsellors or use online resources to help you create a budget, learn about saving, and understand more about credit scores.
Take Control of Your Financial Future with Become Debt Free
If you’re feeling overwhelmed by debt and seeking a solution that suits your needs, consider reaching out to the experts at Become Debt Free. Our dedicated team understands the challenges you’re facing and can guide you towards a suitable debt solution, including Individual Voluntary Arrangements (IVAs).
With our extensive knowledge and experience in the field of debt management, we’re committed to helping you regain control of your situation. Our personalised formal debt solutions ensures that we tailor our advice to your unique circumstances, taking into account factors such as your total debt, income and long-term goals.
Don’t let debt define your life. Take the first step towards becoming debt-free by contacting Become Debt Free today for debt advice. Our compassionate team is ready to provide the guidance and support you need to navigate the complexities of an IVA and pave the way for a brighter financial life.
Visit our website at www.becomedebtfree.co.uk or call us at 0800 169 1536 to schedule a free, confidential consultation for debt support. As an IVA provider we will work together to find the right solution for you and embark on the path towards financial freedom.
We have our own in house insolvency practitioner who can propose IVAs on your behalf.
Remember, you don’t have to face your debt alone. Become Debt Free is here to help you every step of the way with debt advice.
Frequently Asked Questions
To further assist you in your decision-making process, we have compiled a list of commonly asked questions about IVAs and DROs.
1. Why would a DRO be refused?
A DRO could be refused for several reasons, such as having assets or surplus income above the allowable limit, having total debts over £30,000, or if you’ve had a DRO in the last six years.
2. Can bailiffs come if I have an IVA?
Once an IVA is in place, creditors cannot use bailiffs or take further legal action without the court’s permission. This protection is one of the benefits of an IVA.
3. Does a DRO check your bank account?
Yes, when applying for a DRO, your financial situation will be thoroughly examined, which includes checking your bank accounts.
4. How long does a DRO stay on your credit score?
A DRO stays on your credit file for six years from the date it was approved.
5. Can an IVA check my bank account?
Yes, your Insolvency Practitioner (the person who manages your IVA) will need to have a comprehensive understanding of your financial situation, which includes information about your bank accounts.
6. What happens if my circumstances change during an IVA or DRO?
If your circumstances change during an IVA or DRO, it’s essential to inform your Insolvency Practitioner as soon as possible. Depending on the nature of the change, your monthly payment might be adjusted, or in some cases, the IVA or DRO may need to be reconsidered.
Remember, the path to becoming debt-free is different for everyone. These solutions should be considered as part of a wider financial plan and not as a standalone solution. Always seek professional advice before making a decision.
