Alternative Debt Solutions
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When looking for a debt solution, you’re presented with many different options all with varying advantages and disadvantages. Dealing with debt is hard enough and trying to weigh up which one is right for you can be a difficult and arduous 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).
In short, whether you get an IVA or DRO is largely dependent on your current income as well as if you’re a homeowner. An IVA is better suited to those who possess debts over £6,000, have at least 2 different creditors, and own a house or an asset of value. These can often be protected in the agreement. You will also need to have a regular income which can cover the repayments every month.
A DRO is better suited to those who cannot afford any kind of repayment and don’t own a home. You must have debts under £20,000 and have a limited disposable income (no more than £50 after you’ve paid your household expenses).
To find out more about IVAs and DROs read on…
Minimum of £6,000 unsecured debt.
You owe £20,000 or less.
Regular, stable income.
You do not own a house.
More than one creditor.
You have less than £50 disposable income at the end of each month after paying tax, national insurance, and household expenses.
Your assets aren’t worth more than £1,000 in total.
You haven’t had a DRO in the last 6 years.
Debts which can be in included
Arrears on household bills (rent gas, electric, telephone and council tax), credit cards, payday loans, overdrafts, catalogues, store cards, benefit overpayments, items bought on finance, debts to family or friends.
Arrears on household bills (rent gas, electric, telephone and council tax), credit cards, payday loans, overdrafts, catalogues, store cards, benefit overpayments, hire purchase agreements, items bought on finance, debts to family or friends.
Debts which can’t be included
Mortgages and secured loans, hire purchase agreements, court fines, TV license arrears, student loans, child support arrears, social fund loans.
Court fines, TV license arrears, student loans, child support arrears, social fund loans.
Can only have £1,000 total worth.
Interest and Charges
Cannot be added.
Can be added.
The two biggest differences here are, to qualify for a DRO, you must have a very limited disposable income and not be a homeowner. Whereas with an IVA you need a regular, stable income, and you can protect your home.
Therefore, it makes more sense to go with an IVA if you are a homeowner or have an asset you want to protect. Also, hire purchase agreements are included within the DRO, but they are not included within an IVA. You are also able to add your partner’s debt to an IVA but not in a DRO.
The next two tables detail the benefits and risks which come with each debt solution:
You make one affordable monthly repayment worked out between you, your debt advisor, and creditors.
If you can’t keep up with repayments your IVA could fail and you may be in a worse position as you will have to pay fees to an insolvency practitioner.
If you own a home, usually, you will be able to keep it.
Your credit rating will be negatively affected for six years.
There are no set up fees before your IVA is agreed.
If your IVA fails, your creditors could get your insolvency practitioner to petition for your bankruptcy.
Once you’ve made your final payment any unsecured debt is written off.
Your monthly budget will be restricted by your repayment plan.
Creditors will not be able to contact you and must go through your debt advisor.
Your IVA is on a public register (but it is unlikely people check it).
There are many benefits to an IVA. Stopping creditor contact and having just one affordable monthly repayment take a significant amount of stress away from debt. At the end of the six years, any remaining debts also get written off. On average we write off around £13,500 worth of debt per customer! As you have tried to pay back as much as you feasibly can, IVAs have much less social stigma around them than bankruptcy. However, if you fail to keep up with IVA payments then the agreement could fail which can put you in a worse position. That means, before agreeing to an IVA, you need to ensure you can keep up with the monthly repayment which has been agreed.
Creditors cannot take any further action against you without the court’s permission.
The DRO could be revoked if you don’t cooperate with your creditors and advisor during the year it’s enforced.
An affordable and realistic formal proposal of repayment will be worked out between you, your debt advisors, and creditors for a year.
You will be committing an offence if you take out credit of more than £500 and don’t disclose it to your DRO.
Your DRO freezes debt repayments and interest 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 will be written off.
Your DRO is entered on a public register.
DRO is a cheaper alternative to bankruptcy.
You will need to pay a one-off non-refundable payment of £90.
DROs are the preferable option to bankruptcy because they are lower cost. If you cannot afford to make any kind of repayments, then a DRO is a more suitable solution to you compared with an IVA. However, if you do qualify for a DRO it’s important to remember that it will stay on your credit history for six years.
If you need help deciding which debt solution is right for you, we have a team of financial advisors with more than 15 years of experience in dealing with debt.
No, they are two different processes. Although they are both a form of insolvency the main difference is that to apply for a DRO you must have a very limited disposable income and cannot be a homeowner. With a DRO you get all your debts written off if your circumstances haven’t changed by the end of the year. Whereas, with an IVA, you pay back some of the debts you owe. Return to the tables above to compare similarities of a DRO and IVA.
Both an IVA and a DRO will affect your credit rating for six years. Usually, an IVA is seen as better than a DRO on your credit report as you do pay some of the debts back, whereas – with a DRO – all your debt is written off. However, it also depends on how much you owe and your agreement with creditors. To find out specifics you will need to go through your options with a debt advisor.
Debt write off applies to unsecured debts and on completion of an IVA. A debt write off amount of between 20% and 80% is realistic, however the debt write off amount for each customer differs depending upon their individual financial circumstances and is subject to the approval of their creditors.
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