What’s Better – an IVA or DRO?

When looking for a debt solution, you’re presented with many different options all with varying advantages and disadvantages. Weighing up the best way to get your finances back on track can be a difficult task. To make life a little bit easier, we’ve summed up the main advantages and disadvantages of two popular debt solutions; an Individual Voluntary Arrangement (IVA) and a Debt Relief Order (DRO).

The main differences between an IVA and a DRO

To give you an overview and make your choice a little easier, the main differences between an IVA and a DRO are:

• An IVA works well for those with unsecured debts over £6,000 to multiple creditors, who own their own assets and can afford to make some payment to their creditors;
• A DRO might be best suited to you only if you can’t afford any repayment and you don’t own a home or assets over £1,000 and have unsecured debts of under £20,000.

In short, whether you get an IVA or DRO is largely dependent on your disposable income as well as if you’re a homeowner, or have any assets. An IVA is better suited to those who possess unsecured debts over £6,000, have at least 2 different creditors, and may own a house or an asset of value. These can often be protected in the agreement. This can be an ideal option for you if you have a regular income which can cover your repayments every month. Our advisors are experienced at conducting affordability tests to make sure that you can afford the payments and it’s well suited to your needs.

A DRO is better suited to those who cannot afford any kind of repayment and don’t own a home or assets over £1,000. You must have unsecured debts under £20,000 and have a limited disposable income (no more than £50 after you’ve paid your household expenses).

The advantages and disadvantages of an IVA

Benefits of an IVA

There are many benefits to an IVA. Stopping creditors chasing you for payments and having just one affordable monthly repayment can take a significant amount of stress away. Upon successful completion of the IVA any remaining unsecured debts also get written off. On average our customers will write off around £10,600* worth of unsecured debt.

• Creditors will not be able to contact you regarding payment and must go through your Insolvency Practitioner.
• You make one affordable monthly repayment worked out between you, your Insolvency Practitioner, and creditors;
• Once you’ve made your final IVA payment any remaining unsecured debt is written off;
• If you own a home, usually, you will be able to keep it;
• There are no set-up fees before your IVA is agreed.

* Average unsecured debt anticipated to be written off for IVAs approved between 1 January 2021 and 31 December 2021 for FSS customers is £10,645.20, based upon successful completion.

Disadvantages of an IVA

• You will be expected to keep your expenses within a monthly budget whilst in the IVA. We’ll make sure you can afford your reasonable expenses, though;
• If you can’t keep up with repayments your IVA could fail and you may be in a worse position as your creditors could add the interest and charges which would have applied to your debts. This is why it’s important to us to check your affordability before you go ahead with the IVA – our advisors are experienced at checking affordability;
• Your credit rating will be negatively affected for six years from the date the IVA is approved. This is also true for a DRO. In the long-term, however, there may be advantages to having an IVA so that you can repay your debts and later rebuild your credit score;
• If your IVA fails, your creditors could request your Insolvency Practitioner petitions for your bankruptcy.
• Your personal details regarding the IVA will appear on a public register.

Our advisors can talk to you about your individual circumstances to help you work out whether the advantages of the IVA outweigh these challenges. Let us know your situation and we will get in touch to help you.

Risks and benefits of a DRO

Benefits of a DRO

• Creditors cannot take any further action against you without the court’s permission.
• An affordable and realistic formal proposal of repayment will be worked out between you, your debt advisors, and creditors for a year. If you can not afford any payment at all you will not be required to contribute to your debts.
• Your DRO freezes interest and charges for 12 months.
• At the end of the DRO, if your situation hasn’t changed and you’re not able to pay the debts off, all debts included in the DRO will be written off.
• DRO is a cheaper alternative to bankruptcy.

Risks of a DRO

• The DRO could be revoked if you don’t cooperate with your creditors and advisor or your circumstances change during the year it’s enforced.
• You will be committing an offence if you take out credit of more than £500 and don’t disclose it to your DRO.
• Your credit rating will be negatively affected for six years.
• Your DRO is entered on a public register.
• You will need to pay a one-off non-refundable payment of £90.

If you need help deciding which debt solution is right for you, we have a team of over 100 people. Our company has more than 15 years of experience in dealing with debt across our companies. We’ve heard many different situations and can help you regain control of your finances so you can focus on the things that matter to you.

How does a DRO or an IVA affect your credit rating?

Both an IVA and a DRO are likely to negatively affect your credit rating for six years.

After successfully completing an IVA or DRO, it will then be possible to start to rebuild your credit rating.