Which is better a DRO or an IVA? There is a very simple answer!

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 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.

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 £50 a month spare income” test.

If an IVA firm says your IVA monthly payment would be £80, you may still be able to pass the “under £50 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 £20,000 AND
• an IVA firm says you would pay less than £100 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.

(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 £80 a month – that would be £4800 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.

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 your class and two more classes in your year all in a room.

• if everyone went for a DRO, probably one person in the room would have their DRO fail.
• if everyone went for an IVA, then 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 £80 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.

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