Debt can quickly spiral out of control, but solutions such as Debt Relief Orders (DRO) are designed to help individuals regain control of their financial situation. This guide provides an overview of how DROs and other debt relief options work, and how they may be the right solution for managing unmanageable debts.
What is a Debt Relief Order (DRO)? #
A Debt Relief Order (DRO) is a formal insolvency solution designed to assist individuals who are struggling with personal debts and are unable to repay them. DRO debts include specific qualifying debts such as credit cards, rent arrears, and utility bills, which can be included in a DRO. A DRO allows for a freeze on your qualifying debts for 12 months, and after this period, those debts are often written off completely. This can be a fresh start for those with few assets and little disposable income.
The Purpose of a DRO #
The primary purpose of a DRO is to protect individuals from creditor action, allowing them to take a step back from their debts and potentially have them written off after a set period. During the 12-month DRO period, creditors listed in the DRO cannot take legal action against you, providing relief from creditor pressure.
The Benefits of a DRO #
A DRO offers significant benefits to individuals facing unmanageable debts. It stops most creditors from taking any further action against you and allows for debts to be written off after a 12-month period. You are also allowed to keep essential assets, such as basic household items and a vehicle worth less than £2,000. This can provide vital breathing space for people overwhelmed by their financial situation.
Eligibility and Application Process #
To be eligible for a Debt Relief Order, you must meet specific criteria. These include having debts of £30,000 or less, spare income of no more than £75 per month after covering normal household expenses, and assets worth no more than £2,000. you must be living in England or Wales and not be involved in another formal insolvency procedure such as bankruptcy or an Individual Voluntary Arrangement (IVA). The application process must be completed through an approved intermediary, such as a debt adviser, who will assess your situation and help submit your application to the Insolvency Service.
Debts Covered by a DRO #
A DRO covers various types of qualifying debts, including credit card debts, loans, overdrafts, rent arrears, council tax arrears, and utility bills. hire purchase agreements and conditional sale agreements may be included in the DRO. However, it’s important to note that some debts, such as student loans, magistrates court fines, and certain income taxes, cannot be included. It is crucial to ensure that all relevant debts are included in the DRO application, as creditors cannot be added later unless there is a valid reason for the omission. A DRO will stay on your credit record for six years, affecting future credit applications and other aspects of life.
Debts Not Covered by a DRO #
While a Debt Relief Order (DRO) can help you write off most of your debts, there are some exceptions. The following debts are not covered by a DRO:
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Magistrates court fines and confiscation orders relating to criminal activity
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Child support and maintenance
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Student loans
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Social fund loans
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Compensation for death and injury
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TV licence arrears
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Crisis loans
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Income tax debts
These debts will still need to be paid, and you should make arrangements to pay them separately. It’s essential to discuss these debts with your debt adviser to determine the best course of action. Understanding which debts are excluded from a DRO can help you plan more effectively and avoid any surprises during the DRO period.
The DRO Application Process #
When applying for a DRO, you must accurately list all your debts in the application process. If you forget to include a debt and it’s later discovered after the DRO has been approved, the debt cannot be added. if the official receiver finds that you were not truthful in your application, they may revoke your DRO or take further action against you. The application process involves working with an approved intermediary who submits your DRO application to the Insolvency Service. Once approved, the official receiver oversees the process and ensures creditors are informed.
The Official Receiver’s Role #
The official receiver plays a critical role in reviewing and approving the DRO. They ensure that your application is accurate and complete. If they find any discrepancies, such as undisclosed assets or income, they have the power to revoke the DRO. you must inform the official receiver of any changes to your circumstances during the DRO period, as this could affect the status of your DRO.
Debt Relief Restrictions Order (DRRO) #
A Debt Relief Restrictions Order (DRRO) may be issued if the official receiver finds that you have been dishonest or reckless in applying for a DRO. A DRRO can extend the restrictions of a DRO for a period ranging from 2 to 15 years. These restrictions may limit your ability to borrow money or act as a company director. If you breach the restrictions set out by a DRRO, further legal action may be taken against you.
Managing Your Finances During a DRO #
During the DRO period, you must adhere to certain rules regarding your financial activities. You should not take out any new loans or enter new credit agreements without informing the official receiver. you are not required to make payments towards the debts listed in the DRO, as they are frozen during this period. It is also important to manage your bank account carefully and avoid falling into further debt during the DRO period.
Managing your credit reference file is crucial during the DRO period, as the DRO will be recorded on it for six years. This documentation is necessary when seeking credit or updating your credit reference file.
Restrictions During a DRO #
If your DRO application is approved, you will be subject to certain restrictions during the DRO period, which usually lasts 12 months. These restrictions include:
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You cannot take out credit or obtain a credit card
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You cannot obtain a loan or mortgage
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You cannot apply for a credit facility
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You must not break any of the restrictions, as this can lead to a Debt Relief Restrictions Order (DRRO) being made against you
It’s crucial to follow these restrictions to avoid any further action being taken against you. Your debt adviser will explain the restrictions in more detail and help you understand what you can and cannot do during the DRO period. Adhering to these rules is essential to ensure the successful completion of your DRO.
What to Expect After a DRO #
The DRO period typically lasts for 12 months. Once this period ends, the restrictions are lifted, and most of your debts are written off, including any interest that may have accrued. After the DRO ends, it’s important to keep records of your DRO documentation, as you may need it for future reference or to demonstrate that your debts have been cleared. A cleared DRO can eventually lead to an improved credit rating, as different lenders assess credit history based on various factors.
Alternatives to a DRO #
If you do not qualify for a DRO, other debt solutions are available, including bankruptcy, debt management plans, and Individual Voluntary Arrangements (IVA). Each of these solutions comes with its own pros and cons, so it’s essential to seek advice from a debt adviser to determine which option is best suited to your financial situation.
Getting Help with a DRO #
If you’re struggling with debt and think a DRO might be the right solution for you, it’s essential to get help from a qualified debt adviser. A debt adviser can:
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Help you determine if you’re eligible for a DRO
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Explain the DRO process and what to expect
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Assist you in completing the DRO application form
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Provide guidance on managing your finances during the DRO period
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Offer support and advice throughout the DRO process
You can find a debt adviser through a reputable debt charity or organisation. They will provide you with free and impartial advice to help you make an informed decision about your debt situation. Remember to always check the eligibility criteria and restrictions before applying for a DRO. Seeking professional advice can make the process smoother and ensure you understand all aspects of a DRO.
Improving Your Credit Score After a DRO #
A DRO will affect your credit score for six years, which can impact your ability to access credit during this period. However, there are steps you can take to improve your credit score after the DRO period ends. Making regular, on-time payments, keeping your credit utilization low, and monitoring your credit report can all help improve your score. It’s also important to check your credit report regularly to ensure it accurately reflects your current situation.
Debt Relief Orders (DROs) and Your Credit Report #
A DRO will appear on your credit report for six years from the date it was approved. Once the DRO period ends, it should be marked as ‘discharged’ on your credit report. You should check your credit report to ensure this information is correctly updated. If the DRO is not properly reflected, you may need to contact the credit reference agency to have it corrected.
Debt Relief Order (DRO) FAQs #
- What is a DRO, and how does it work? A DRO is a formal insolvency solution designed to help individuals who cannot repay their debts. It freezes debt repayments for 12 months, after which the debts may be written off.
- Who can apply for a DRO, and what are the eligibility criteria? Individuals with debts under £30,000, limited assets, and low spare income may qualify for a DRO. Eligibility criteria include living in England or Wales and not being involved in another insolvency process.
- How long does a DRO last, and what happens when it ends? A DRO lasts for 12 months. Once the period ends, most of the debts listed in the DRO are written off.
- Can I get a DRO if I have a high level of debt or assets? No, to qualify for a DRO, your total debts must be £30,000 or less, and your assets should not exceed £2,000.
- How does a DRO affect my credit score, and how can I improve it? A DRO will negatively affect your credit score for six years. You can improve your credit score by making regular payments on time and keeping your credit utilization low.
Conclusion #
A Debt Relief Order (DRO) can be a practical solution for managing unmanageable personal debts, but it’s important to understand the eligibility requirements and application process. Consulting a debt adviser is essential to determining whether a DRO or another debt solution is the best option for your circumstances. After the DRO period ends, it’s crucial to take steps to rebuild your credit score and keep track of your credit report to ensure accuracy.