IVA or DRO?

18 August2009

IVAs (Individual Voluntary Arrangements) and DROs (Debt Relief Orders) are two forms of insolvency - two ways of legally acknowledging that you can`t repay the money you owe.

IVAs and DROs can both write off the unsecured debt you can`t afford to repay. They will both appear on your credit record for six years, making it harder and/or more expensive to access further credit for that time.

However, there are significant differences between IVAs and DROs.

DROs

Introduced on 6th April 2009, DROs are a new form of insolvency which is designed to help people who have relatively low debts, low incomes and few assets - and who do not own their home. DROs last for 12 months, after which the individual will be freed from all debts included in the DRO, as long as their circumstances have not changed significantly.

DROs are only appropriate for people who:

  • Are unable to pay their debts.
  • Owe less than 15,000.
  • Do not own more than 300 in assets (although they can own a car worth 1,000).
  • Do not have a monthly disposable income (what`s left after their essential expenses) of more than 50.
  • Live in England or Wales - or have lived or carried on business in England or Wales at some time in the last three years.
  • Have not been subject to another DRO within the last six years.
  • Are not involved in another formal insolvency procedure at the time they apply.

Between April and June 2009 (the first quarter after their introduction), 1,978 people in England and Wales entered a DRO.

IVAs

IVAs may be appropriate for people who can`t keep up with their debt repayments and who aren`t able to repay their debts in a reasonable period of time.

An IVA is a legally binding agreement between a borrower and their lenders. If they can agree on the terms:

  • The lenders will agree to freeze interest, not to take any (further) action while the IVA is in progress, and to write off any outstanding debt once the IVA comes to a successful conclusion.
  • The borrower will, in most cases, commit to making monthly payments for five years, based on what they can afford after they`ve taken into account their monthly essential expenditure (mortgage/rent, utility bills, food & petrol costs, essential clothing, etc.). They may also have to agree to release equity in their home towards the end of the IVA.

An IVA is an agreement, and it can`t go ahead unless enough of the lenders approve of the terms. The borrower will work with their IP (Insolvency Practitioner) to draw up an IVA Proposal, which tells the lenders how they think the IVA could work.

When the lenders vote on this, lenders who collectively `own` 75% of the debt must approve of the IVA Proposal for the IVA to start.

Note that:

  • Lenders who don`t vote at all won`t be included in this calculation.
  • If it`s approved by enough lenders, lenders who don`t agree (or who don`t vote at all) will also be bound by the terms of the IVA.

As long as the borrower upholds their side of the agreement, lenders won`t be able to change their minds once the IVA has been accepted.

Between April and June 2009, 12,225 people in England and Wales entered an IVA.

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