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IVA or DRO: which is the better option?

If you're looking for debt help, you might have heard of both IVAs (Individual Voluntary Arrangements) and DROs (Debt Relief Orders) as ways to deal with unmanageable unsecured debts. But which is better?

It depends on your circumstances. Answering a few of the following questions should give you a better idea about which debt solution to choose.

How much debt do you have?

Debt Relief Orders are designed to help people whose unsecured debts total £15,000 or less - whereas an Individual Voluntary Arrangement is usually more suitable for people with debts over that figure.

The IVA figure isn't a 'hard and fast' rule, though. You might be eligible for an IVA if you find yourself with a lower amount of unsecured debt that you simply cannot deal with yourself. You should be struggling to meet your monthly repayments - and unable to see yourself repaying your debts in full in a realistic timeframe.

If you're not sure whether you're eligible for a DRO or IVA, it's worth seeking professional advice about your situation. Click here to fill out a callback form.

Do you own a home?

An IVA might be the right debt solution for you if you're a homeowner, as bankruptcy might require you to sell your home. An IVA would probably require you to release some equity in your home during your final year, but it's very unlikely to force you to sell your home.

A DRO, on the other hand, is not a viable option for homeowners. This is because you have to meet a very specific set of requirements to enter a DRO. You must not, for example, own assets worth over £300 collectively (apart from a car worth up to £1,000). So DROs simply aren't suitable for homeowners.

Can you commit to monthly payments?

Though you can't manage your unsecured debt payments as they stand, you might be able to commit to lower monthly payments.

If you can, an IVA might be the best solution for your needs. If your lenders agree, it will lower your repayments to a level you can afford to commit to each month. You'll need to be able to make these payments every month for five years. Once your IVA is complete (usually after five years) any remaining unsecured debt will be written off, as long as you've lived up to your side of the agreement.

DROs, on the other hand, are designed for people with a very low level of disposable income. After all of your essential expenses are paid for each month, you're only eligible for a DRO if you have £50 or less left over as 'disposable income'. This means it's very unlikely you'll be able to commit to monthly repayments of any size. If you're accepted onto a DRO your unsecured debts will be frozen for a year. During this year you won't need to pay anything towards these debts and interest and charges will be frozen. Your situation will be reviewed again after a year, and if your finances haven't improved enough, your unsecured debt will be written off.

Do you know the disadvantages?

Both of these debt solutions have disadvantages - most notably a damaged credit rating for six years from the date you started them.

If you're really struggling with your unsecured debts, however - which is likely if you're reading about either of these solutions - they might be the best way for you to tackle your problem debts. And it's worth considering that if you'd carried on struggling with your unsecured debts, your credit rating would have been damaged anyway.

If you've got any more questions about IVAs, click here to see some answers to commonly asked questions.

By Matthew Plant.

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Subject to eligibility and acceptance. Fees Payable. Debt write off applies to unsecured debts only and on completion of an IVA, alternative solutions may be offered. If your IVA fails, it could lead to Bankruptcy. Your ability to obtain credit will be affected for at least 6 years. Homeowners may be required to release the equity in their property.