Everyone has heard of bankruptcy, but Debt Relief Orders (DROs) and Individual Voluntary Arrangements (IVAs) are less well known.
Here is a comparison of IVAs and DROs, so you can see would be better for you.
DROs and IVAs were the two most common types of personal insolvency in England and Wales in 2023.
Some choices between debt solutions are genuinely hard. When I wrote about comparing IVAs with DMPs, I said they were like apples and pears…there are pros and cons for both.
But for DROs and IVAs, it’s more like chalk and cheese – and luckily the choice turns out to be easy!
Comparing DROs and IVAs
One of the problems about saying anything useful about IVAs is that, in theory, they can vary massively. If I put “it depends” on most lines in the IVA column in the table below, that wouldn’t be at all helpful.
But most IVAs follow a set pattern and that is what I am describing here. I have also tried to give an indication of how often something can be a problem.
| DROs | IVAs | |
|---|---|---|
| max debt | this is being increased to £50,000 in June 2024 | no maximum |
| own house? | no | yes – may have to release equity in last year |
| own car | the permitted value of a car is being increased to £4,000 in June 2024 | usually not a problem |
| car on finance | often a problem | sometimes a problem eg when finance ends during IVA |
| other assets | no more than £2,000 (second-hand value – normal household possessions are ignored) | usually not a problem |
| spare income | less than £75 a month according to DRO calculations | more than £50 a month according to IVA calculations |
| can creditors still chase | no | no |
| interest frozen | yes | yes |
| fee | no fee at all | £3500+ paid from monthly payments |
| monthly payments | none | yes – may change at annual review |
| duration | 1 year | usually 5 or 6 years – may be extended. 8% last more than 7 years |
| failure rate | very low – 1% | very high – Covid payment breaks make recent numbers hard to assess, but it may be over 20% for IVAs started in the last few years |
| how public | on insolvency register for 1 year | on insolvency register until completes |
| credit record | on for 6 years | on for 6 years or longer until it completes |
| borrow money | very difficult – must inform lender about DRO if borrow more than £500 | very difficult – need permission from IVA firm to borrow more than £500 |
| employment | rarely affected | rarely affected |
| can be company director | no – being a sole trader is OK | yes |
Can you have a DRO?
You need to find out if you can have a DRO, not guess from the above table. What is a DRO? looks at the rules in detail.
The hardest rule for you to assess is the “less than £75 a month spare income” test.
If an IVA firm says your IVA monthly payment would be £100, you may still be able to pass the “under £75 a month spare income” DRO test because the calculations are not the same.
As a rule of thumb, if:
- you are renting AND
- your debts are less than the DRO maximum limit of £50,000 AND
- an IVA firm says you would pay less than £125 a month
you need to talk to a free sector debt adviser about whether you qualify for a DRO. IVA firms are not DRO experts and some are, frankly, trying to sell you an IVA because of the fees they get.
(And if you are renting and you can’t have a DRO you should consider bankruptcy, but that is a whole different article!)
If you can have a DRO it will be better than an IVA – simple!
The two key lines in the table are monthly payments and failure rate.
In a DRO you don’t pay any monthly payments. In an IVA you make payments for at least five years. Say an IVA firm says your payments would be £125 a month – that would be £7,500 over five years.
So obviously you will be much better off in a DRO.
Also a DRO is massively less likely to go wrong and fail. And it finishes after a year, whereas an IVA means stress and monthly payments and annual reviews for 5 years.
The main reason IVAs fail is when someone can no longer afford to make the payments. Five or six years is a long time, things change in your life and the economy – new baby, redundancy, Covid, cost of living crisis, etc. If you start with low IVA payments, say £150 a month, there is very little room to reduce your payments if your income falls or your expenses go up. Your IVA may well fail.
In summary, a DRO finishes quicker, you don’t have to make any payments and it very rarely fails.
How many IVAs fail?
Car finance – problems in an IVA
V says
Where can I go to arrange a DRO?
Sara (Debt Camel) says
You can go to your local Citizens Advice or you can phone National Debtline on 0808 808 4000.
If a DRO is not a good option for you, the debt adviser can look at what your other choices are.
Kelly says
Hi
I took a loan out before covid as I was going to buy a van and have a holiday. Then all this shit happened, I lost my job and my ex stopped contributing to his kids. Will a DRO help me with the loan and credit card bills? Any advice appreciated x
Weatherman says
Hi Kelly
It entirely depends on your circumstances. The basic criteria for a DRO are:
– Under £50 disposable income a month
– Assets (savings/investments/property) of under £1,000
– Either no vehicle or a vehicle worth under £1,000
– Relevant debts of under £20,000 (some debts can’t be included in a DRO, like court fines, or debts that are secured against property)
If you meet all those criteria you might be able to get a DRO. But really before you decide exactly route you want to go down, you should speak to a debt adviser, who can look at your whole situation and go through your different options and their implications. Call National Debtline on 0808 808 4000
Sam says
Hi,
I have been in an IVA for a year and I have £16,000 in debt. I am currently paying £350 p/m. From reading your article, I feel that a DRO is a better option. I fit the criteria (renting/ no car etc) however is it a simple process to leave an IVA and start a DRO? When the DRO is finished in a year’s time, would I be able to apply for mortgages?
Sara (Debt Camel) says
In a DRO you have to have less than £75 a month spare after paying all your essential bills.
If you are managing to pay £350 a month to your IVA, that sound unlikely…
Is the £350 a month a struggle? Do you have expenses your IVA firm is not taking into account?
Paul says
Hi Im about 14k in debt and 16k with my overdraft. Do they include this as paying that off alone is a chore.
Disposable income of under £70 I would say that’s about right but how do they prove this? I pay my ex partner for the upkeep of the kids but it’s not anything set in stone by Csa.
I do have a mortgage with my ex partner still but I pay for the entire upkeep of it
Can you get a dro with a mortgage?
Sara (Debt Camel) says
You cannot get a DRO when you own a property.
Lou says
Hi, my husband is currently going through the process of getting an IVA but we have been told that we only have £40 spare income for the payment. The debt is £25,000.
I rent the property and my husband isn’t on the tenancy as he moved in afterwards.
We have a Van on lease hire and a car on finance, both of which are business vehicles. They are worth more than £1000 each.
Would my husband still be eligible?
Sara (Debt Camel) says
This IVA is just for your husband? Or is it for your debts as well? Are you both self employed?
the 25k – what sort of debts is this?
Lou says
It’s just for my husband. It’s fro his tax bill bank loan and credit card.
Yes we are both self employed
Sara (Debt Camel) says
So if this is just for his debts, your tenancy and any car finance in your name is not relevant.
I think he should talk to Business Debtline https://www.businessdebtline.org/ on 0800 197 6026 about his situation and whether he would be eligible for a DRO. Cars on finance are complicated, especially for the self employed. This doesn’t mean I am saying he won’t be eligible, just that Business Debtline are the experts in this area.
Lilian says
Has been 6 months that I am paying £100 monthly to IVA(creditfix) which I thought was a good deal at first because I was in debt with more than £6000 and I don’t have any assets just my and small bills but I still got 4 years and half to pay. I didn’t know about DRO and they didn’t mention it either.
Sara (Debt Camel) says
Are these £100 payments easy to mange? Or is it getting harder with rising prices?
Lilian says
Well Sara, I try to administer my money but is not very good to be on the budget most of the time, but it is essential to keep on track obviously would be great to direct this money to something else.
Sara (Debt Camel) says
If you think you will find it difficult to continue to make these payments for the rest of the IVA, then talk to National Debtline on 0808 808 4000 now about whether you would qualify for a DRO.
Molly says
I’m considering whether to go into an IVA (StepChange) to erase government overpayment debts. arrears and council tax totalling £30,000. They saIid I don’t qualify for a DRO because of my excess income of £200. I don’t feel it’s right but I’ve combed through finances but still feel I have nothing left at the end of the month. (Single mum with two children) I already have agreements in place with all creditors but the councils have become aggressive in enforcing these debts by way of DEAs. I’ve been paying off these debts for a few years by myself the IVA seems like another long contract when I just want it all to be over. Is a DRO better in my situation?
Sara (Debt Camel) says
They said I don’t qualify for a DRO because of my excess income of £200.
who said this? IVA firms will make large fees by getting you to agree to an IVA…
A DRO is always better than an IVA if you qualify. Talk to your local citizens Advice
Claire says
Hi, I entered into an Iva last year after some bad advice from an Iva company. My circumstances have changed due to declining health so I am worse off now and my Iva is set to increase by £50 per month for 12 months and then by a further £200 per month after that. I believe I now and probably always did meet the less than £75 a month clause for a DRO However I am slightly worried because my partner has a mortgage on the house we live in all in his name. We have completely separate finances however I am concerned that if I stop paying my Iva to force them to terminate it they could make me bankrupt and make a claim for the house. Any advice is appreciated
Sara (Debt Camel) says
Why are your IVA payments going up? Have you told the IVA company about your declining health?
Claire says
So I was told during the process of sorting the Iva I wouldn’t have to pay more that £150 per month, however on the day it completed I was told it would have to be over 6 years and that it would increase at regular intervals the last 20 months I will be paying
Claire says
£350 . I have spoken to the company but all they said was if I couldn’t make the payments I would be In breach. After a bit of pushing they offered me a 3 month payment break but this will be added on to the end of the iva
Sara (Debt Camel) says
Do you have a house with equity? A car that you own worth over £4,000?
What is the total debt in the IVA?
Claire says
No, the mortgage is in my partners name only, I don’t own a car as I don’t drive and debts total £23000
Sara (Debt Camel) says
Ok I suggest you talk to your local Citizens Advice about a DRO, or phone national Debtline in 0808 808 4000