If you’re struggling to pay off unsecured debt, you may be researching debt solutions that offer you the breathing space you need to pay off your debts.
Two of the most popular debt solutions in the UK are Debt Relief Orders and Individual Voluntary Arrangements, but how do you know which is best for your financial circumstances?
In this guide we’ll compare DROs and IVAs, including how they work, how long they last, and their impact on your credit file, to help you decide which is the right debt management plan for you.
Why choose Creditfix?
- Write off unsecured debts over £6,000
- Stop interest and charges soaring
- Reduced payments from £110 per month
What are Debt Relief Orders and an Individual Voluntary Arrangements?
Debt Relief order (DRO)
Only available in England and Wales, a Debt Relief Order (DRO) is a debt solution aimed at people who have serious debt problems but very little disposable income they can use to repay the money they owe.
When you apply for a DRO you work with a debt adviser known as the ‘Official Receiver’ to set up the arrangement, and pay a small fee.
In return, your unsecured debts will be written off after a period of 12 months.
A DRO is best suited to people with a disposable income of no more than £75 per month.
Individual Voluntary Arrangement (IVA)
An IVA is one of the most popular debt relief solutions in England and Wales, as well as Northern Ireland.
An IVA allows you to transform your unsecured debts into one affordable monthly payment based on your income.
You work with an Insolvency Practitioner (a debt professional licensed by the Insolvency Practitioners Association) to set up the arrangement and calculate the level of payment you can afford.
Once in your IVA, you will usually make monthly IVA payments for five of six years.
This system ensures you always have enough money for household expenses during your payment term.
Once your payment term has been completed, any unsecured debts not covered by your monthly contribution will be written off, meaning you can no longer be pursued for payment by creditors.
Comparing debt solutions: Debt Relief Orders and IVAs
Lots of the people we talk to every week wonder whether they would be better off with an IVA or a DRO.
There isn’t an easy answer to that question because the right solution to your money worries will be based on your individual circumstances.
You should always seek debt advice before making this kind of decision, but what we can do is give you some more information on DROs, IVAs, and how they compare so that you can make a more informed decision when the time comes.
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How long do the debt solutions last?
DRO
The duration of a DRO is usually fixed at 12 months. This period is known as a debt moratorium, which means you will be protected from creditors during this time.
Once 12 months passes, the unsecured debts included in the arrangement will be wiped off.
IVA
The length of an IVA varies depending on your circumstances but will usually last for five years.
If you are a homeowner with a significant amount of equity, you may be asked to remortgage which will allow you to end your arrangement after five years as planned. If you have little or no equity, you may have to make monthly payments for another year, taking your IVA payment schedule to six years.
Once your monthly payment term has ended, you will no longer be required to make a monthly contribution, and any unsecured debt that hasn’t yet been paid off will be written off by your creditors.
What are the qualifying debts for DROs and IVAs?
DRO
To be eligible for a DRO you must have debts of £50,000 or less, and a disposable income of less than £75 per month to put towards your unsecured debts.
Debts that are covered by a DRO include:
- Utility bills
- Council tax arrears
- Credit card debt
- Personal loans
- National insurance arrears
- Benefit overpayments
IVA
To qualify for an IVA, you should have a stable income that allows you to make a payment of at least 110 per month towards the arrangement.
The following unsecured debts can be included in an IVA:
- Credit cards
- Store cards
- Council tax arrears
- Household bills
- Payday loans
- National insurance arrears
- Benefit overpayments
What debts can’t be included?
DRO
Debts that can’t be included in a DRO are known as ‘excluded debts’.
Examples of excluded debts include:
- Child maintenance arrears
- Court fines
- Hire purchase agreements
- Social fund loans from the DWP
- TV license arrears
IVA
All secured loans are excluded from an Individual Voluntary Arrangement (IVA). The list of debts that aren’t covered by an IVA include:
- Mortgage arrears
- Car finance loans
- Hire purchase agreements
- TV license arrears
- Student loans
- Social fund loans
- Debts incurred through fraud
What impact will it have an impact on my credit record?
DRO
When you enter a Debt Relief Order it will be listed on the Insolvency Register, along with your personal details.
The Insolvency Register is available to the public, which means the DRO will also be listed on your credit file.
This will have a negative impact on your credit rating in the short-term as it sends a signal to lenders that you have missed debts and had difficulty repaying credit in the past.
This can make it difficult to do things like open new bank accounts or be accepted for a mortgage.
All evidence of your DRO will be removed from your credit file after six years, leaving you free to begin rebuilding your credit rating.
IVA
As with all debt solutions, credit ratings will be affected by the use of an IVA. Similar to a DRO, IVAs are listed on the public Insolvency Register and will therefore be included on your credit report.
Having an IVA against your name can make it difficult to obtain new credit in the short term, but details of your IVA will be wiped from your credit report six years after your arrangement first began.
Can I obtain credit during the debt solution?
DRO
It’s possible for you to obtain credit during a Debt Relief Order, but it may be a challenge.
During your 12-month moratorium period you won’t be able to borrow a figure in excess of £500 without declaring your DRO to the lender.
It’s then a matter for the lender to decide whether to let you borrow money, but most lenders view someone in a live debt solution as a serious risk, and your credit rating is likely to have suffered in the short-term.
IVA
Similar to a DRO, it’s possible to access new credit during your IVA, but this time the decision is in the hands of the Insolvency Practitioner who manages the arrangement on your behalf.
If you want to borrow money over £500 during your IVA, you need the permission of your Insolvency Practitioner, who will deal with each decision on a case-by-case basis.
What happens assets like my home?
DRO
A Debt Relief Order isn’t suitable for homeowners. You can only qualify for a DRO if you own assets that are valued at £2,000 or less. This means that, as long as your assets come to a total value of £2,000 or less, they will be protected.
If you own a vehicle, is must be valued at £4,000 or less.
IVA
IVAs are suitable for homeowners, and allow you to deal with your unsecured debts while protecting your assets.
An IVA will allow you to keep your home, although if you hold a significant amount of equity in the property you may be asked to release equity towards your IVA in order to end the arrangement after five years, rather than the usual six.
Does it allow me to write off my unsecured debts?
DRO
Yes, if you qualify for a Debt Relief Order, you will enter a moratorium period of 12 months during which you cannot legally be pursued for your debts.
At the end of that moratorium period, all the debts included in your DRO will be wiped clean.
IVA
An IVA often includes a debt write-off. Throughout your IVA, you will make a series of monthly payments based on your affordability.
Once your payment term ends (usually after five or six years) any debts that haven’t been paid off will be written off by your creditors.
Are IVAs and DROs legally binding?
A legally binding debt solution, also known as a formal debt solution, is one that offers you legal protection from your creditors.
DRO
A Debt Relief Order is legally binding. Once your 12-month moratorium period begins, your creditors will no longer be able to pursue legal action against you over unpaid debts, and the interest and charges on your debts will be frozen.
IVA
An IVA is also a formal debt solution. From the moment your creditors approve of your IVA proposal and the arrangement is ratified by your IVA provider, your arrangement becomes legally binding.
For the entire length of your arrangement, interest and charges on your unsecured debts will be frozen, and your creditors won’t be able to pursue you in court.
This gives you the peace of mind you need to concentrate on dealing with your debts.
What happens if miss my debt repayments?
Sometimes people’s financial circumstances change while they’re in an active debt solution. While it may be possible to miss a one-off payment, it’s important to understand there are serious consequences for someone who continually misses payments to their DRO or IVA.
DRO
If you are in a Debt Relief Order and your financial situation changes during the moratorium period, you should contact the official receiver immediately.
They may be able to come to an accommodation with you, but if you are found to have misled the official receiver over your debt level, or you no longer meet the DRO criteria, they may decide to terminate your DRO.
As an alternative, they might place you under a Debt Relief Restrictions Order, which can extend the terms of your DRO for up to 15 years.
IVA
If you’re in an IVA and you repeatedly fail to make your monthly payments, you risk breaching the terms of your IVA. Once your IVA is in breach, your creditors will have the opportunity to terminate the arrangement early.
It’s important to note that if your IVA fails, you will be expected to repay your creditors in full, and the terms may be less favourable.
You’ll go back to paying tax, interest, and charges on your debts, and may have to repay what you owe over a shorter timescale.
Where can I get debt advice and more information on improving my financial situation?
If you owe money to several creditors and have people chasing you for payments you can’t afford, it can be difficult to see a way out.
At Creditfix, we’re dedicated to helping people like you regain their financial freedom. Our debt advice and practical solutions have helped over 250,000 people deal with their debt and get their lives back on track.
To get free initial advice or discuss a cheaper alternative to repaying what you owe, talk to a trained Creditfix debt advisor today on 0800 0431 431.
Where can I get more advice on DRO vs IVA: Which debt solution is best for you? and other debt solutions?
To discuss your options and get the support you need to deal with your debt today, contact us now on 0800 0431 431 or click the button to get started
