Debt can be overwhelming, especially when you feel like there’s no way out. For individuals in the UK who are struggling to manage their debts, a Debt Relief Order (DRO) can provide a practical solution. This guide will walk you through everything you need to know about DROs, including the eligibility criteria, the application process, and what happens after your DRO is approved. If you’re looking for a way to deal with your debt without the cost and complexity of bankruptcy, this guide is for you.
Understanding Debt Relief Orders (DROs) #
A Debt Relief Order (DRO) is a type of formal insolvency arrangement and a debt solution designed to help individuals who have little disposable income, low assets, and a small amount of debt. The purpose of a DRO is to freeze your debt repayments for 12 months, after which, if your circumstances haven’t changed, your debts will be written off. The DRO is managed by an official receiver who oversees your case, but you can only apply through an ‘approved intermediary,’ who will help you assess whether the DRO is right for you.
What is a Debt Relief Order (DRO)? #
A Debt Relief Order (DRO) is a solution to deal with personal debts you cannot pay. It provides relief by freezing the debts for 12 months and, at the end of that period, writing them off if your financial situation has not improved. During the 12 months, creditors cannot contact you to demand payment or take enforcement action against you. A DRO can be a lifeline for those struggling with unmanageable debts, but it’s important to meet the strict criteria to qualify.
A DRO can write off your debts after 12 months if your application is successful. However, not everyone can apply for a DRO. You must meet specific criteria regarding your income, assets, and the total amount of debt you owe. You can only apply for a DRO through a special adviser called an ‘approved intermediary’, who will assess your financial situation and help you through the application process.
a DRO will remain on your credit file for six years, which may hinder your ability to acquire credit in the future.
Eligibility for a DRO #
A DRO is not available to everyone. The government has set out strict eligibility criteria that you must meet to apply. This ensures that only those who genuinely need this type of debt relief are able to use it. The criteria are based on the amount of debt you have, your income, and the value of your assets.
One important criterion is having limited spare income, which indicates your financial situation and capacity to make payments toward debts.
Who is Eligible for a DRO? #
To be eligible for a DRO, you must meet the following conditions:
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You must owe less than £30,000 in total debts.
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You must not own your home or have any substantial assets. Your total assets should not exceed £2,000, and any vehicle you own must be worth less than £2,000.
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You must have little or no disposable income (less than £75 per month after paying essential household expenses).
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You must not be involved in any other formal insolvency proceedings such as bankruptcy or an Individual Voluntary Arrangement (IVA).
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You cannot apply for a DRO if you are a director of a limited company or have shares in a limited company.
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Income tax arrears can be included in the total debts.
It’s important to note that a DRO is designed for individuals with minimal income and assets. If you own property or have valuable assets, you may need to consider alternative debt solutions such as bankruptcy or an IVA. The DRO is often seen as the last resort for those who do not have the means to repay their debts.
The DRO Application Process #
The process of applying for a DRO is relatively straightforward, but it requires the assistance of an approved intermediary. These intermediaries are often debt advisers from organisations like Citizens Advice or StepChange. It is crucial to obtain free and impartial debt advice before applying for a DRO to ensure you understand all your options and the implications of each choice. They will assess your financial situation and determine whether a DRO is the right solution for you.
How to Apply for a DRO #
You can apply for a DRO for free, but you must use an approved intermediary. The intermediary will help you prepare your application and ensure that all the necessary information is included. You will need to provide accurate information about your income, assets, and all your credit debts. This information will be reviewed by the official receiver, who will make the final decision on whether to approve your application.
The Insolvency Service has rules about applying for a DRO, and the official receiver will decide whether to approve your application. You will need to provide accurate details about all your debts, income, and any assets you own. The process typically takes a few weeks, during which the official receiver will assess your eligibility.
Once your DRO is approved, your creditors will be informed, and your debts will be frozen for 12 months. During this time, you won’t have to make any payments towards the debts listed in the DRO, and your creditors won’t be able to take any enforcement action against you.
After You Apply #
Once you have submitted your DRO application, the official receiver will review it to ensure you meet the eligibility criteria. If your application is successful, you will receive a confirmation letter from the Insolvency Service, and your DRO will be added to your credit reference file. Your creditors will also be notified, and they will be prohibited from taking any further action against you to recover the debts listed in your DRO.
Debts Covered by a DRO #
Not all types of debt can be included in a DRO, but most personal debts will qualify. It’s important to understand which debts are covered by a DRO and which are not, as this will affect your decision to apply.
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Credit card debts
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Overdrafts
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Personal loans
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Utility arrears
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Rent arrears
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Conditional sale agreements: These agreements involve financial obligations and can impact liabilities. They may be included or excluded from a DRO application based on specific conditions, and creditors have rights if the terms are not met.
Which Debts are Covered by a DRO? #
You can include most types of debt in your application as long as your total debts are less than the £30,000 limit. These debts are known as ‘qualifying debts’, and they can include:
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Personal loans
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Store card debts
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Utility bill arrears
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Overdrafts
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Hire purchase agreements (if the item is not essential, like a car)
Debts that can be included in a DRO are called ‘qualifying debts’. They include personal debts, credit debts, and other debts. The key is that these debts are unsecured, meaning they are not tied to any asset like a house or a car.
Debts Not Covered by a DRO #
While many types of unsecured debts can be included in a DRO, some debts cannot. Even if they are listed in your application, you will still be responsible for repaying these debts in full.
Which Debts are Not Covered by a DRO? #
Some debts do not count towards the £30,000 limit, although you still have to list them in the DRO application. This means you are still liable to pay these debts in full. Examples of debts not covered by a DRO include:
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Magistrates court fines
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Confiscation orders relating to criminal activity
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Child maintenance payments
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Student loans
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Certain types of benefits overpayments
It’s crucial to understand that these debts will not be written off as part of your DRO. You will need to make separate arrangements to pay these debts, even if your DRO is approved.
The Role of the Official Receiver #
The official receiver is a key figure in the DRO process. This government official is responsible for overseeing your application and making the final decision on whether your DRO should be approved.
What is the Official Receiver’s Role? #
The official receiver is a government official who will deal with your application. They will decide whether to approve your application and will be responsible for administering your DRO. Once your application is submitted, the official receiver will review the information provided and ensure that you meet the eligibility criteria.
You must co-operate with the official receiver throughout your DRO application. This means providing any additional information they request and following their instructions. If you do not cooperate, your application could be rejected or your DRO could be revoked.
Effects of a DRO #
A DRO can have a significant impact on your financial situation, both during the 12-month period and afterwards. It’s important to understand how a DRO will affect your day-to-day life and your financial future.
What are the Effects of a DRO? #
If your DRO application is approved, it can affect you in the following ways. First, you will not have to make payments towards the debts listed in the DRO during the 12-month period. This can provide much-needed relief for individuals struggling to keep up with their debt repayments.
Creditors listed in your DRO cannot ask you to make payments during the DRO period. This means they cannot take legal action against you, and they must stop any enforcement activities. After the 12 months, if your financial situation has not improved, the debts included in your DRO will be written off.
The DRO Period #
The DRO period typically lasts for 12 months, during which time you will not be required to make any payments towards the debts listed in your DRO. This period is designed to give you a fresh start and allow you to focus on managing your finances without the burden of debt. However, it’s essential to note that you will still be required to pay any ongoing payments, such as rent, utility bills, and council tax.
How Long Does a DRO Last? #
A DRO typically lasts for 12 months, but in some cases, it may be extended. If your financial situation improves during the DRO period, you may be required to make payments towards your debts. If this happens, your DRO may be revoked, and you will be required to make payments towards your debts. However, if your financial situation does not improve, your DRO will be discharged at the end of the 12-month period, and your debts will be written off.
Restrictions During a DRO #
During the DRO period, you will be subject to certain restrictions. You will not be able to obtain credit, take out a loan, or enter into a credit agreement without disclosing your DRO to the creditor. You will also be required to inform the Insolvency Service of any changes in your circumstances, such as an increase in income or a change of address. Failure to comply with these restrictions may result in your DRO being revoked, and you may be required to make payments towards your debts.
What Restrictions Will Be Placed on You? #
During the DRO period, you will be subject to the following restrictions:
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You will not be able to obtain credit, take out a loan, or enter into a credit agreement without disclosing your DRO to the creditor.
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You will not be able to take out a mortgage or secure a loan against your home.
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You will not be able to take out a credit card or obtain a credit limit increase.
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You will not be able to enter into a hire purchase or conditional sale agreement.
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You will be required to inform the Insolvency Service of any changes in your circumstances, such as an increase in income or a change of address.
It’s essential to note that these restrictions are in place to ensure that you do not accumulate further debt during the DRO period and to give you a fresh start. If you are unsure about any of the restrictions or have any questions, you should consult with your debt adviser or the Insolvency Service.
Debt Relief Restrictions Order (DRRO) #
While a DRO can provide significant relief, it comes with responsibilities. If the official receiver finds that you have not been honest in your application or if they believe you have behaved irresponsibly, they may take further action.
What is a Debt Relief Restrictions Order? #
If the official receiver finds that you have not been honest and open about your finances either before or during the DRO, or they decide that you have behaved irresponsibly, they may ask you to agree to a ‘debt relief restrictions undertaking’. This is a formal agreement that places restrictions on your financial activities.
If you refuse, they may apply to the court for a ‘debt relief restrictions order’. This order can impose restrictions on you for up to 15 years, limiting your ability to borrow money, run a business, or act as a company director.
Bank Account and DRO #
One common concern for individuals applying for a DRO is how it will affect their bank account. In most cases, your bank account will remain open, but there are a few things to keep in mind.
What Happens to My Bank Account During a DRO? #
If your DRO application is successful, your bank account will not necessarily be frozen. It will be up to your bank or building society to decide if you are allowed to keep the account open. Some banks may choose to close your account, particularly if you have an overdraft that is included in the DRO.
If your bank account is closed, you can open a new basic bank account that does not have an overdraft facility. These accounts are available from most high street banks and provide essential banking services without the risk of incurring more debt.
Credit Rating and DRO #
A DRO will have a long-term impact on your credit rating. While it can provide relief from your immediate debt problems, it will affect your ability to borrow money in the future.
How Will a DRO Affect My Credit Rating? #
Credit reference agencies keep information on DROs for 6 years, just like other information. This means that your DRO will appear on your credit reference file for six years, and it will likely lower your credit score. During this time, it may be difficult to obtain credit, and you may face higher interest rates if you are approved for a loan.
A DRO will appear on your credit reference file, which can affect your credit score. However, if your debts are unmanageable and you are struggling to make repayments, the short-term hit to your credit rating may be worth the long-term relief provided by a DRO.
Alternative Debt Solutions #
If you do not qualify for a DRO, or if you decide that a DRO is not the right option for you, there are other debt solutions available. Each of these solutions has its own benefits and drawbacks, so it’s important to seek professional advice before making a decision.
It is crucial to obtain free and impartial debt advice before choosing a debt solution, ensuring that you understand your options and the implications of each choice.
What Other Debt Solutions are Available? #
If you do not qualify for a DRO, there may be other solutions available to deal with your debts such as bankruptcy, a debt management plan, or an Individual Voluntary Arrangement (IVA). These solutions can help you manage your debts, but they may come with higher costs or longer-term commitments.
You should get free and impartial advice before applying for a debt relief order. Organisations like StepChange and Citizens Advice can help you understand your options and choose the best solution for your circumstances.
Debt Relief Order (DRO) vs. Other Debt Solutions #
It’s important to compare a DRO with other debt solutions to ensure that you are making the right decision for your financial situation. While a DRO can provide significant relief, it may not be the best option for everyone.
How Does a DRO Compare to Other Debt Solutions? #
A DRO is a cheaper option than bankruptcy that may be able to help you if you do not own your home, have few assets, and little available income to pay your creditors. It is a more straightforward process than bankruptcy, and it typically costs less to apply.
A DRO can write off your debts after 12 months if your application is successful. This is one of the key benefits of a DRO, as it provides a clear path to becoming debt-free within a relatively short period.
Conclusion #
A Debt Relief Order (DRO) is a solution to deal with personal debts you cannot pay. It is designed for individuals with minimal assets and income, and it can provide significant relief by freezing your debts for 12 months and writing them off if your financial situation has not improved. You can only apply for a DRO through a special adviser called an ‘approved intermediary’. A DRO can write off your debts after 12 months if your application is successful, but it’s important to understand the eligibility criteria, the effects of a DRO, and the alternatives before making a decision.
If you are struggling with debt, it’s essential to seek advice from a debt adviser before applying for a DRO. Organisations like StepChange, Citizens Advice, and the National Debtline can provide free, impartial advice to help you understand your options and choose the best solution for your circumstances.