The Difference Between a Debt Relief Order and an Individual Voluntary Arrangement
When you’re struggling with unaffordable personal debt, the support offered by an insolvency solution can be a real lifeline. But with so many options available, trying to decide which is right for you can be overwhelming.
Two of the most popular personal insolvency procedures are Debt Relief Orders and Individual Voluntary Arrangements. Both serve as alternatives to bankruptcy, but there are some very key differences between them.
In this guide, we’ll explain how each process works, what makes them unique, and which one is right for you.
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What Is a Debt Relief Order?
A Debt Relief Order—or DRO—is an alternative to traditional bankruptcy designed for people with low monthly income and few personal assets.
Known as “bankruptcy lite”, it operates in mostly the same way: you’re subject to the terms of the DRO for 12 months, after which all of your debts are completely written off.
The key difference is the price – you need to pay £680 to declare bankruptcy, whereas applying for a DRO is totally cost-free.
To be eligible for a DRO, you must:
- Not own your home
- Have less than £50,000 in total debts
- Have less than £75 per month in disposable income
- Not have more than £2,000 in assets (savings, etc.)
Debt Relief Orders were designed to make insolvency solutions accessible for those who cannot afford to declare bankruptcy or enter an IVA. Not everyone meets the eligibility criteria, but for those who do, a DRO can be one of the best ways to get back to a debt-free life.
What Is an Individual Voluntary Arrangement?
An Individual Voluntary Arrangement–or IVA– is another alternative to bankruptcy. The solution is designed to help people deal with their debts without losing their hard-earned personal assets.
When you enter an IVA, you agree to make certain payments towards your debts over a period of 5-6 years. These instalments can be as little as £50 per month. So long as you keep up with your payments, you and your assets are protected from creditors.
Your debts are frozen throughout the IVA. No interests or charges can be added by your creditors. At the end of the IVA, any remaining debts can be written off.
To enter into an IVA, you’ll need the backing of 75% of your creditors. This may sound daunting, but it’s actually much easier than you think. Creditors simply need to be assured that they’ll get a good return and that you’ll be able to keep up with your repayments.
IVAs are the ideal debt solution for homeowners. They allow you to become debt-free without surrendering your house or other valuable assets.
What’s the Difference Between a DRO and an IVA?
Debt Relief Orders are niche solutions, tailored to those without much in the way of income or assets. They’re perfect for those who are eligible, allowing you to become debt-free in just 12 months, without any cost.
IVAs, on the other hand, are tailored for people on the other end of the spectrum. If you have a steady, reasonable income and assets you want to protect, they’re the ideal solution for you. They’re not as quick as some other insolvency measures, but they do have significantly less impact on your day-to-day life.
To put it simply:
- Debt Relief Orders are designed for those without assets
- Individual Voluntary Arrangements are designed for those with assets they want to protect
Is a DRO or an IVA Better for My Credit Score?
A Debt Relief Order lasts for 12 months, whereas an IVA lasts for 5-6 years. This might lead you to believe that a DRO is better for your credit score. However, this isn’t the case.
DROs and IVAs remain visible on your credit file for 6 years. As insolvency procedures, they’re viewed by creditors in the same way as bankruptcy. This means it will be very hard to take out loans or get a mortgage during these 6 years.
However, this isn’t necessarily a bad thing.
Being unable to take out loans or other credit will help to keep you debt-free in the long run. If you get a DRO, it might be more difficult to get a mortgage from mainstream lenders, but you should still be able to get help from a specialist lender. If you have an IVA, it’s likely you own your own property, and you don’t need to worry about getting a mortgage.
What Alternative Solutions Are Available?
A Debt Management Plan (DMP) is an informal agreement made between you and your creditors. They’re the ideal solution for those with smaller debts and a reasonable income.
You reach out to your creditors – with the help of a debt charity like Stepchange – and propose a payment plan that is more affordable for you. In exchange for you sticking to this plan, creditors will agree not to chase you for the debts and pause any interest. This means you’ll generally be safe from bailiffs and bankruptcy petitions.
Debt Management Plans aren’t legally binding, so creditors can break the agreement and begin debt-collection efforts against you at any time. However, it’s unlikely they’ll do this. Most know that pressuring you will just reduce their chances of getting fully repaid.
Despite the stigma, bankruptcy can be one of the effective ways to get back on track to a debt-free life.
When you declare bankruptcy, you surrender your valuable assets—such as your home and vehicle—so that they can be sold to help repay your debts. After 12 months, any remaining debts are written off.
If your home has little equity or your income is low, declaring bankruptcy is often the most cost-effective solution.
How Do I Know Which Solution Is Right for Me?
If you think you need the support of a formal insolvency procedure, it’s crucial you seek the guidance of an insolvency practitioner.
Rushing into something without the proper insight can result in needlessly losing your property or making unnecessary payments.
Our expert team can assess your situation and help you to make the right solution. Whether it’s a DRO, bankruptcy, or an IVA, we’ll make sure your interests are protected.
Get in touch today to book a free, no-obligation consultation.
