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.
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.
|max debt||£30,000||no maximum|
|own house?||no||yes – may have to release equity in last year|
|own car||not worth more than £2,000||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|
|fee||£90||£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.
9% last more than 7 years
|failure rate||1%||very high – probably over a third for IVAs started since 2016|
|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 £30,000 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 £90 a month – that would be £5,400 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 table has failure rates as percentages. If you find it hard to think about them, here is an example.
At school you were probably in a class of about 30. Imagine three classes in your year all in the school hall.
- if everyone went for a DRO, probably one person in the school hall would have their DRO fail.
- if everyone went for an IVA, then 30 people, the whole of one class, would have their IVAs fail.
The main reason IVAs fail is when someone can no longer afford to make the payments. Five or six years is a long time and things go wrong.
If you start with very low payments, say £100 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.
A DRO finishes quicker, you pay much less and it very rarely fails.