From 29 June 2021 the rules about who can have a Debt Relief Order (DRO) are being relaxed so a lot more people will qualify. For example, under the old rules your debts had to be less than £20,000 – now they can be up to £30,000. And other DRO criteria have also been widened.
The Insolvency Service thinks an extra 13,000 people a year may now qualify for a DRO. Are you one of them? If you are in an IVA, you are renting and your IVA payments are less than about £120 a month, you may be much better off switching from an IVA to a DRO.
This is especially important if you are early in your IVA or if you are finding the IVA payments difficult and you are not sure you will be able to get to the end.
Why a DRO is better than an IVA
If you qualify for a DRO, it will be better than your IVA in three ways:
- You don’t have to make any monthly payments in a DRO. After paying the £90 DRO fee, that’s it, no more payments.
- A DRO only lasts for a year – at the end of twelve months, your debts are written off. So if your IVA has years to go, a DRO will clear your debts more quickly.
- DROs very rarely fail – only about 1% go wrong. A lot of IVAs fail, possibly about 30%, when people can no longer manage to make the monthly payments.
So for most people a DRO is much cheaper, shorter and less risky than an IVA.
When you started the IVA it probably felt like the answer to all your money problems. But if you don’t think you can get to the end of your IVA, it’s better to face up to this now, not try to postpone the decision.
You aren’t alone in this situation, 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.
Your IVA may have been sensible when it was started, but a change in circumstances (pay drop? higher bills? new baby? separation?) may now be making it hard to afford the payments.
Perhaps a DRO would always have been better than an IVA for you but no-one explained this at the start. Or a DRO may now be right for you because of the relaxed rules.
Covid-19 has meant many IVA have got longer
If your household income has fallen from furloughing, self-employment earnings drying up, or redundancy then it will have been hard to make your IVA payments.
Measures were brought in to help people get through this difficult period, see Coronavirus – new IVA rules. These allowed you to take payment breaks, so the time until your IVA ends was extended.
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 long IVA payment breaks 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.
Find out if 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, 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 £30,000;
- you can’t own a property. This is a strict rule – it doesn’t matter if there is negative equity, if you don’t live there, if it can’t be sold… it will still stop you qualifying for a DRO;
- a car you own must be worth less than £2,000;
- you can’t have had a previous DRO within the last six years;
- you have little spare income (under £75) each month after all your expenses.
(The DRO limits described in this article are the new limits that are being introduced from 29 June 2021. If you see other articles on the internet with other numbers, then they haven’t been updated for the new rules.)
The “under £75” spare income is the hardest for you to assess.
Your IVA firm may have said you can afford to pay £95 a month to the IVA – that sounds as though it is more than the £75 maximum allowed for a DRO… but the DRO calculations are different, you may be allowed more money for some expenses than your IVA firm permitted.
As a rule of thumb I would say that many people paying £100 a month to an IVA may qualify for a DRO now. And some people paying more, say £120, may qualify.
If your only income is from benefits then you will always qualify for a DRO (providing you meet the other criteria, eg your debts are under £30,000). This is even if you get a lot of disability benefits, because a DRO allows for your extra disability costs.
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 may 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 decide if it is a good idea to end your IVA and start a DRO.
This mainly depends on how far you are through your IVA.
If you are early in your IVA
If you are having 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 your IVA will go on for 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 your debt adviser can get your DRO application prepared so it can go in quickly after your IVA is formally marked as failed.