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 2019.
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 | £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 at start of IVA or 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 | £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 30% for IVAs in 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 £30,000 AND
- an IVA firm says you would pay less than £125 a month
then 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.
How long do IVAs last and how many fail
Car finance – problems in an IVA
A couple may need different debts options
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.
Daniel Griffiths says
Another great unbiased article
Hilary says
As usual your articles are very informative and helpful x
S says
Hi
I entered into an IVA in January this year with Payplan.
I have debts around £23k ( one being HMRC).
I advised Payplan at the time that I would be changing job in March with the same salary.
My council tax has gone up by £23 a month ( £23 above the figure in my plan) and under new legislation I have to pay 5% of my salary to a pension.
I now have a negative balance of minus £53 a month on my income / expenditure
Payplan are now saying my IVA is not suitable but have offered no alternative solution or comments..
What can I do ?
Jan Williams says
Great article. I am going to save it as a reference source. Thank you
Issy says
I’m currently on an Iva finishing in 3 years, recently I’ve had refunds in 5 loans and the debts are clear , can I ask for these to now be removed from the Iva subsequently lower my debt ?
Sara (Debt Camel) says
How large were the refunds?
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
Sara (Debt Camel) says
I agree you need debt advice. Loans and credit card debts can go into a DRO – as can utility bills, payday loans, catalogues etc
But you need an expert like the National Debtline advisers to look at your whole situation and explain your options and the pros and cons of each.
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?