If you’re struggling with debt, then you may be looking towards opting for a debt solution.
There are many debt solutions available in the UK with the most prominent of them being an Individual Voluntary Arrangement (IVA), a Debt Management Plan (DMP) and a Debt Relief Order (DRO).
In this post, I’ll be comparing the Debt Relief Order and the Individual Voluntary Arrangement in order to determine which debt solution could be most suitable for you.
How does an IVA Work?
An IVA is a formal and legally-binding agreement between you and your creditors which states that you will make monthly payments towards your debt for an agreed-upon period of time.
This time is typically five years. You will only be obligated to pay an amount of money each month that is affordable to you.
At the end of the agreed-upon duration, if there is debt remaining which hasn’t been paid off yet, it will be written off.
The great thing about IVAs is that they are affordable, manageable and quite flexible depending on what your financial circumstances are like.
You will never be pressured to pay more than you can afford and as a result of this, you can get a significant portion of your debt written off.
Furthermore, an IVA obligates your creditors to freeze all interest and charges on your debt as well. Thus, you save a lot of money that you would have otherwise had to pay in the form of interest.
Your monthly IVA payments are determined by the disposable income you make every month. You will have to provide proof of your household income and expenses when you’re applying for an IVA.
If you have a lot of valuable assets such as a house and/or a car, then an IVA is definitely the appropriate debt solution to go for. This is because an IVA protects your assets from being seized and sold off by your creditors.
While IVAs are definitely a great way to get rid of your debts, some debtors have a lot of trouble getting them approved. This is because your creditors have to agree with the terms of your IVA in order for it to be put in place.
Please note that when it comes to Individual Voluntary Arrangements, your creditors are under no obligation to accept your proposal. Thus, there’s a chance that you may have to seek some other way to manage your debt.
Another important thing to note with IVAs is that they stay on your credit file for six years. This is true even if the IVA itself lasts five years. Thus, while your IVA finishes in five years, it still continues to have an effect on your ability to obtain credit for a further 12 months.
Your name is also placed in the Insolvency Register and it stays there throughout the duration of your IVA. Your name will get removed within three months after your IVA finishes.
The Insolvency Register is a public database that people can look up to determine whether you
As a debtor, you need to be aware of how an IVA affects your life before you apply for one.
How does a Debt Relief Order (DRO) Work?
A DRO is a formal and legally-binding agreement between you and your creditors. A DRO lasts for 12 months and when it is put in place, your creditors are not allowed to contact you regarding your debt or demand payments for them.
After the period of 1 year has passed, your financial circumstances are reassessed. If it’s found that you still can’t afford to pay back your debt, then your debt is completely written off.
To be eligible for a DRO, your debts must total up to less than £20,000. In addition to that, you must have little to no assets and must have a disposable income of no more than £50.
Please ensure that you meet all of the eligibility criteria before you apply for a DRO.
In order to get a DRO, you have to pay an application fee of £90. You can pay this in instalments if you’d like. Please note that you will not get this money back if your DRO application is rejected.
While it’s true that a DRO is mainly for individuals with little to no assets, you may still get approved for one if you have assets that have a value of less than £1,000 and they are assets which you need for your work or your studies, etc.
A DRO is often considered to be a cheaper and quicker alternative to bankruptcy because just like bankruptcy, it results in your debts being completely written off.
It’s important to note that you don’t have to make any payments during the 1 year during which a DRO is in place.
Make sure that you are aware of the fact that if your financial circumstances do end up improving by the end of the moratorium period, then you will be obligated to pay back your debts.
While a DRO is a formal and legally-binding agreement, it does not need court approval to be put in place.
Please note that just like an IVA, a DRO is also logged into your credit report and has an extremely negative impact on your credit score as a debtor.
It’s also important to note that while a Debt Relief Order only lasts a year, it still stays in your credit file for six years.
Which Debt Solution is Better: DRO or IVA?
There’s no one solution which is better than the other. All of it depends on what your financial situation is like and which debt solution works best for you.
For example, you will never be able to qualify for a Debt Relief Order if you have a ton of valuable assets. Of course, if you have valuable assets, you would want to protect them. In this case, an IVA would be the best choice for you.
On the other hand, if you have little to no assets, there’s really no point opting for an IVA as you would not be reaping the main benefit of an IVA which is the protection of your assets.
There’s also no point opting for an IVA if you have a spare income of less than £50. This is because your creditors are highly unlikely to agree to the terms of your IVA if you present them with monthly payments less than £50.
If you want to become debt-free quickly and don’t have a lot of assets, then a Debt Relief Order would definitely be the right choice for you as a Debt Relief Order lasts one year whereas an IVA can last from anywhere between 5 to 7 years.
As a debtor, you’re going to have to look at all aspects of your finances such as your monthly income, expenditure, debts, assets and credit record in order to choose between debt solutions.
Debt Relief Orders are typically intended for individuals with low income that can’t afford to repay their debts whereas IVAs are intended for individuals that can afford to repay their debts but just need a manageable framework for doing so.
An IVA will protect your assets, freeze your interest and allow you to pay back your debt in a manageable way.
A DRO will freeze your payments for a year and if your financial circumstances after that year has passed, your debts will be written off.
What are Debts that can be included in an IVA?
Debts that can be included in an IVA are:
- Catalogue debt
- Personal loans
- Credit card debt
- Gas and electric (utility) arrears
- Council tax arrears
- Payday loans
- Store card debt
- Income tax and national insurance arrears
- Tax credit or benefit overpayments
- Debts owed to family and/or friends
- Any other outstanding bill for miscellaneous services
What are Debts that can be included in a DRO?
Debts that can be included in a DRO are:
- Household utility bill arrears such as rent, gas, etc.
- Unsecured debts such as credit card debt
- Benefit overpayments
- Hire purchase (HP) agreements
- Debts owed to friends or family
As a debtor, it’s your job to pick from different debt solutions available to you. If you’re having trouble identifying which one would be most suitable for you, you can seek debt advice from an independent charity such as Stepchange or National Debtline.
Debt management can be quite difficult which is why debt solutions are available to debtors. Just make sure you opt for one that is appropriate for your circumstances.