A Debt Relief Order (or DRO for short) is a debt solution that’s ideal for people who have a relatively low level of debt, who are on a low income and who have few or no assets.
It’s a legal process designed to clear most debts included in it. You don’t have to go to court to apply, and you’ll pay a fee of £90 per person to the Insolvency Service.
What are Debt Relief Orders and Individual Voluntary Arrangements?
We’ll explore the exact details of what makes Debt Relief Orders (DROs) and Individual Voluntary Arrangements (IVAs) different a little further on in this guide, but it’s useful to get a quick overview.
An IVA is a debt solution that’s meant for someone who can afford a payment of at least £90 a month towards the debts that they owe. A DRO is a way of dealing with debts that are designed for people who can’t afford to pay this much – and have less than £75 of disposable income available to pay towards their debts each month.
At a glance, the debt solution that’s the right fit for your budget will probably be the one that a debt management company will explore with you first.
Whichever plan looks the best, it’s important to remember that a DRO and an IVA come with different pros and cons. As such, we’ve put together some more information that’ll help you think about which of these options could be the right way for you to handle your debt.
Comparing an IVA with a Debt Relief Order (DRO)
Whether an IVA or DRO is going to be better for you will come down to your unique financial situation – as both debt solutions are designed for different circumstances and different levels of disposable income. Let’s compare a DRO and an IVA, answering some important questions about each:
How long does each debt solution last?
DRO: A DRO lasts for one year.
IVA: An IVA usually lasts for five or six years.
What do you need to qualify?
DRO: To qualify for a DRO, you must owe £30,000 or less. A Debt Relief Order is only available if you are not a homeowner, and things you own (your assets) are worth less than £2,000 in total. Also, you must not have had a debt relief order in the last six years.
You will only be eligible for a DRO if you have less than £75 spare income leftover after your tax, national insurance, and household running costs are paid.
IVA: To be eligible for an IVA, you must owe at least £6,000 to more than one ‘creditor’ (company or individual you’re in debt to). You must also have a regular, stable income.
Which debts can be included?
DRO: A DRO can include missed payments (arrears) on your household bills (things like gas and electric, rent payments, and council tax). Also, a Debt Relief Order can also include ‘unsecured’ debts – like credit cards, personal loans, overdrafts, payday loans, and money that you owe to friends or family.
IVA: Like a DRO, an IVA can include the same kinds of missed debts – like missed payments on your household bills – along with any other unsecured debts, like credit cards, overdrafts, loans, and debt that’s owed to family or friends.
Which debts can’t be included?
DRO: A DRO is designed for unsecured debts, so it cannot include mortgage payments or secured loans. Also, it cannot include hire purchase (HP) agreements, missed TV licence payments, court fines, student loans, child support back payments, or social fund loans.
IVA: An IVA cannot include court fines, TV license arrears, missed child support payments, or social fund loans.
What happens to interest and charges?
DRO: When you apply for a Debt Relief Order, the companies you owe money to will be asked to freeze any interest or additional charges.
IVA: When you’re applying for an Individual Voluntary Arrangement, your creditors will stop charging you interest or any additional fees.
Are they legally binding?
DRO: Yes. A DRO is legally binding – which means both you and your creditors must stick to the agreement.
IVA: Like a DRO, an IVA is legally binding – so you and the companies you owe must stick to the agreement.
What happens to the things you own?
DRO: You will only be eligible for a DRO if your assets (the things you own) are worth £2,000 or less. This includes your car.
IVA: Normally, the things you own will be protected with an IVA. If there’s any chance that your home or assets will not be protected, your Insolvency Practitioner might help you look at other ways of dealing with your debts.
What happens to the debts that are outstanding?
DRO: With a UK Debt Relief Order, your debt is completely wiped at the end of the 12-months. There is no need to pay a monthly payment towards these debts.
IVA: At the end of the arrangement, any remaining debt is written off and your creditors will consider the matter finished.
Do you have to talk to the people you own money to?
DRO: No. The people you owe money to (creditors) will not be able to contact you. Instead, they will have to talk to the Insolvency Practitioner (IP) dealing with your case.
IVA: No. Your creditors will not be allowed to contact you. Again, they will have to talk to your IP if they need to discuss the debt during the six years that the arrangement is in force.
What happens if you forget about some of your debts?
DRO: If you miss any debts when a DRO is set up, the law says you cannot add them later. Instead, you’ll have to make separate arrangements to pay them off.
IVA: It’s rare to miss debts when the arrangement is set up – but if you do, your IP can usually add them later; as long as they’re less than 10% of the overall amount you owe.
Will my job be affected?
DRO: Like bankruptcy, you cannot be a company director of a limited company or hold certain official positions or roles if you’ve got a Debt Relief Order in place.
IVA: With an IVA, you can still hold a position as a company director (which is not possible with debt relief orders or bankruptcy). However, you may need to declare your arrangement to your employer; as some professions will not allow you to keep your position if you’re seen to be in financial difficulties.
What happens to my credit rating?
DRO: Your order will be recorded on your credit file and your credit score will go down – as lenders will consider you to be a serious risk. However, when your Debt Relief Order is complete, you’ll be able to start rebuilding your score. Your DRO will be recorded on your credit score when it’s set up and will stay there for six years.
IVA: A UK Individual Voluntary Arrangement will also damage your credit rating – but even though it runs for six years, it’s recorded on your credit report when it’s set up; so by the time it is complete, it will disappear from your credit ratings and you’ll be able to obtain credit and rebuild your score.