What is a Debt Relief Order (DRO) and how can it help?
Bankruptcy is a frightening prospect with lasting implications so it’s no wonder that you may be reluctant to consider it as an option if you’re struggling to pay debts.
If your circumstances allow, a Debt Relief Order may prove to be a low-cost personal insolvency process designed to help you cope with your personal debt.
So, what exactly is a Debt Relief Order? And how can it help you?
What is a Debt Relief Order (DRO)
Debt Relief Orders (DROs) came into force in England and Wales on 6th April 2005.
A debt relief order (DRO) is one way to deal with certain kinds of debt if you owe £20,000 or less and have no assets and very little spare income.
Once a DRO is made the debtor’s debts are frozen for twelve months. During this time creditors (people that are owed money) cannot pursue the debtor nor can they add interest or charges to the debt.
If after 12 months the debtor’s circumstances have not changed the debts are written off (discharged) and you do not have to pay them.
At a cost of just £90 they are a very low-cost alternative to Bankruptcy.
How does it work
A debtor can only apply for a DRO through an ‘approved intermediary’ – an authorised debt adviser. The Citizens Advice Bureau will put debtors in touch with an approved intermediary in their local area.
You apply to the Official Receiver via the approved intermediary, who will advise you on how to complete the documentation and make the application on your behalf. The intermediary may not charge you for their time but the DRO application costs £90.
If the Official Receiver approves your application, your creditors will be notified.
A moratorium is initiated on approval of the DRO – this is a 12-month period in which your debts are frozen and creditors may not take any action against you. You are not obliged to make payments towards the debts included in your DRO and your creditors cannot force you to pay.
A DRO usually lasts a year unless your situation improves. When the DRO ends, most of your debts will be written off.
Why should I consider a DRO?
- Your debts are frozen and you do not have to pay anything towards your debts for a period of 12 months
- After 12 months, if nothing has changed, your debts are written off.
- The application is very low cost.
Is a DRO right for me?
A DRO may be right for you if you:
- are unable to pay your debts
- owe less than £20,000 in total.
- have assets (savings and other items of value) worth no more than £1,000 (although you may own a car worth no more than £1,000)
- have less than £50 a month of disposable income i.e. after settling living costs.
- have not been subject to a DRO in the past 6 years and are not currently the subject of another formal insolvency arrangement or an individual voluntary arrangement (IVA)
- ou have lived or worked in England or Wales in the last three years.
Not all debt can be included in your application – only qualifying debts may be included in making up the £20,000.
Qualifying debts include:
- • credit cards, overdrafts and loans
- • arrears with household bills including rent, utility bills, telephone bills, council tax and income tax
- • benefits overpayments
- • debts you owe to friends and family
- • business debts.
If you are behind on your rent payments, your landlord may still evict you, even if the rent arrears are included in your DRO. This means you may have to continue paying these after a DRO is made.
Debts that do not qualify and therefore may not be included in the debt total, and which you will still need to pay off, include:
- mortgages and other secured loans
- hire purchase for goods that you need
- child support and maintenance
- student loans
- damages or fines a court has ordered you to pay
- unpaid TV licence fees
- Social Fund loans
- any debts you incur after the DRO is granted.
It is therefore crucial that you tell your DRO adviser about all your debts. A debt cannot be added to the list after the DRO application is made.
What are the risks?
You must continue to pay any new debts that do not form part of the DRO.
If you run up new debts after the DRO is granted, you could face:
- a bankruptcy order
- prosecution, if you incurred a debt without telling the creditor about your DRO.
During the DRO period, you will be subject to restrictions. These are:
- you cannot borrow £500 or more without telling the lender
- you may not manage or set up a limited company, or be a company director, without getting permission from the court
- if you have a business under a different name from the one under which you got the DRO, you’ll have to tell any suppliers, contractors or customers the name you used when you got the DRO
- while the DRO is in force, and for three months afterwards, your details will appear on the Insolvency Service’s Individual Insolvency
Register, which can be viewed by anyone.
The consequences of a DRO may have a longer-term effect on your life and wellbeing – the impact may include:
- • the DRO will be recorded on your credit history for six years
- • your bank may close your account and ask you to open a new account
- • you may not hold a power of attorney over someone else’s financial affairs
- • if any of your debts are for goods bought on hire purchase, you might need to give the goods back
A DRO is a good option if you have significant debt and do not have the means to pay it back, however, the consequences will have a significant impact on your credit reference and lifestyle.
Before taking steps to apply, it’s a good idea to speak to a debt advisor who will be able to assess your suitability and suggest the best way forward.
You can also access further advice from the Citizens Advice Bureau or the debt charity, StepChange – details below.
Bretts Business Recovery specialises in helping people and businesses in financial distress. We can provide free advice to help you consider all options. Contact us to arrange a no-obligation consultation.
Other sources of help and advice include:
- Citizens Advice – a UK free advice service: https://www.citizensadvice.org.uk/debt-and-money/
- StepChange – a UK debt charity: https://www.stepchange.org/
- Gov.uk – Government website detailing bankruptcy procedures: https://www.gov.uk/government/publications/getting-a-debt-relief-order/getting-a-debt-relief-order#overview