If it’s getting hard or impossible to afford your IVA , you may wonder what your other alternatives are. If you don’t own a house and your debts are under £20,000 you may qualify for a Debt Relief Order (DRO).
Your IVA may have been sensible when it was started, but a change in circumstances (pay drop? rent increase? new baby? separation?) may now be making it hard to afford the payments.
Or perhaps a DRO would always have been better than an IVA for you – quicker, cheaper, less risky – but no-one explained this to you at the start.
In either of these situations, it’s good to look if changing to a DRO would make sense.
These problems were common even before Covid-19
When you started the IVA it probably felt like the answer to all your debts. But if you don’t think you can get to the end of your IVA, it’s better to face up to this, not try to postpone the decision.
You aren’t alone in this situation:
- in 2019 the Insolvency Service found that the numbers of IVAs failing in the first or second year is rising; and
- debt advisers are seeing more people wanting help with an IVA they can no longer afford – often nothing can be done to rescue a failing IVA.
Covid-19 means more IVAs are in trouble, but new rules can help with this
Many people with IVAs will be having reduced household income from furloughing or self-employment earnings drying up or redundancy.
Measures have been brought in to help people get through this difficult period, see Coronavirus – new rules to help people in IVAs.
If you expect your financial problems are only temporary and your IVA was going well before March, talk to your IVA firm as soon as possible about how they can help you get through the next few months.
But if you don’t expect your income to return to normal in the next 6 or 12 months, or if you were already struggling to afford the IVA payments before Covid-19 made things harder, taking a 6 month break at the moment may not be your best choice.
It may be better to accept that your IVA isn’t going to get back on track and let it fail now, if you would then qualify for a DRO.
But if you are a long way through your IVA you have other options, see below.
Do you qualify for a DRO?
As you are thinking about a major change, you must make sure you would qualify for a DRO, not just assume that you will.
Unlike the other main debt solutions (debt management, bankruptcy or an IVA) there are some very specific checks that you have to pass to qualify for a DRO. The main ones are:
- your debts have to come to less than £20,000;
- you can’t own a property. This is a strict rule – it doesn’t matter if there is negative equity, if your ex lives in it and you don’t; if it is abroad, if it cannot be sold… it will still stop you qualifying for a DRO;
- a car you own must be worth less than £1,000;
- you can’t have had a previous DRO within the last six years;
- you have little spare income (under £50) each month after all your expenses.
The last point is the hardest for you to assess. Your IVA firm may have said you can afford to pay £75 a month to the IVA – that sounds as though it is more than the £50 maximum allowed for a DRO. But the DRO calculations are different, so you could still qualify.
The best thing to do is to talk to an adviser who can look in detail and say if you can have a DRO.
I suggest you call National Debtline on 0808 808 4000.
The answer may be that you don’t qualify for a DRO, but you have other options the adviser can help you consider.
If your IVA is unaffordable but your debts are too large, bankruptcy may be a better choice. A debt management plan usually isn’t – even if would have been better at the start, now you have the IVA on your credit record it is usually best to carry on with it.
Is switching to a DRO a good idea?
If you are told you will be able to get a DRO, you need to think about whether it is a good idea to end your IVA and start a DRO. This mainly depends on how far you are through the five year IVA.
If you are early in your IVA
If you are having big problems in the first half of your IVA you may never get to the end of it, so taking action now is a good idea.
A DRO will be all over in a year and you don’t have to make any payments in that year at all.
The only downside is that the DRO will be on your credit record for six years, but that’s usually pretty minor as your credit record is already very poor because of the IVA.
If you are in the second half of your IVA
When you are over half way through your IVA, a DRO may still be your best move but look at other options first and talk to your IVA firm about these. Tell your IVA firm that you have looked into a DRO and you would qualify for one but you want to know what your alternatives are.
Two possible options to discuss with your IVA firm are:
- reducing your payments to an affordable level. Your IVA firm will be able to reduce them by 15%. If a larger cut is needed, your creditors would be asked to approve this;
- finishing your IVA on a “funds paid to date” basis. This is completing your IVA so your debts are wiped out, not failing your IVA. It would mean you don’t have to pay any more. The further you are through your IVA the more likely this is to be approved – in your last year this should definitely be tried first, rather than failing the IVA and starting a DRO!
You should be wary of your IVA firm proposing things that will mean your IVA goes on for even longer. For example they may say they will accept lower payment if you add an extra year on. Sometimes a payment break of 6 months can work well, but is it likely your situation will have improved at the end of it? The longer your IVA will continue for, the more attractive the idea of stopping it and getting a DRO is.
Also be careful about a reduction in payments – lower will obviously be better, but will you still be struggling? Don’t think lower must be affordable, think how long there is for your IVA to go on and whether you are likely to get to the end.
How do you change to a DRO?
There isn’t a simple way to switch over. Your IVA needs to fail first, so you have to stop paying. Tell your IVA firm that you are stopping making your IVA payments and that you want the IVA to fail as soon as possible.
Don’t worry that you will get hassled by your creditors when you stop paying the IVA firm. They can’t do this until the IVA has terminated.
It will take a few months to fail your IVA. During this time you can get your DRO application ready so it can go in quickly after your IVA is formally marked as failed.