Debt Relief Orders: What You Need to Know
If your debts total £20,000 or less, a debt relief order could write them off. First, you need to demonstrate that you’re in financial hardship.
If you’re struggling under the weight of debt you can’t repay, it might not feel like you have many options. But you do. One option that might be available to you is a debt relief order.
Here’s an explainer on what it is, who it’s for and how it can help.
What is a debt relief order?
If you have debts of £20,000 or less, a debt relief order could write them off. Under a DRO, you get a 12 month ‘moratorium’ during which you don’t have to pay certain types of debt, after which point they will usually be ‘discharged’, meaning you don’t need to repay them.
But if your circumstances improve during the 12 months — say, you get a pay rise or a better job, or come into a windfall of more than £1,850 — your DRO could be cancelled and you’d have to start repaying the debts.
What’s required to get a debt relief order?
To get a DRO, you need to demonstrate that you’re in financial hardship. This means you need to have less than £50 left each month after you’ve paid out your essential household expenses and bills.
If you’re a homeowner, or you have assets worth more than £1,000 (aside from things like tools you need to do your job, or essential household appliances) or a car worth more than £1,000, then you won’t qualify. You also must have lived or worked in England or Wales in the last three years, and you can’t have had a DRO within the last six years or be going through bankruptcy proceedings or another type of formal insolvency process.
Not all types of debt are included in a DRO. For example, if you owe anything towards child maintenance, student loans, debts secured on an asset you own, or court fines, these would be out of the scope of a DRO. You can see the full list on the Gov.uk website.
Pros and cons of a debt relief order
The main positive, of course, is that at the end of a DRO your debts can be written off and you can make a fresh start. And, for a year before then, your creditors will be off your back, which means less stress for you. Your creditors can’t demand payment, take you to court or send debt collectors to your home during your DRO, and you can report any creditors that continue to hassle you. Another advantage is that a DRO is cheaper than other types of formal debt solution.
On the downside, a DRO is bad news for your credit file, and stays on it for six years. I don’t care, you might think, I never want to get credit again. But bear in mind a trashed credit record could also mean you’ll struggle to get a mortgage, a mobile phone contract, a bank account or even change utility providers. It’s not just about whether you can take out a new credit card in the future.
Your job could be affected. Some jobs, such as in the financial and legal sectors, specify that you can’t be insolvent, so check your employment contract before you go ahead with a DRO. Your DRO will also be a matter of public record for the 12 months it runs, plus three months afterwards.
The rules around a DRO are strict – if you don’t follow them, you’d be breaking the law. If you run up any new debts after your DRO is approved and don’t tell the creditor you have a DRO, you could face bankruptcy or even prosecution. While you’re in a DRO, you can’t borrow more than £500 or apply for an overdraft without disclosing your DRO to the lender. You also can’t be a company director or set up, manage and promote a new company without getting the permission of a court.
If you’ve been dishonest about anything related to your DRO, you could find the restrictions are extended for up to 15 years.
How to get a debt relief order
You can’t arrange one yourself, you need to use an authorised debt adviser, from a debt charity, for example.
If you decide to go the DRO route, your debt adviser will help you complete an application. Be totally open and honest when you fill in this form. You’ll have to disclose whether you’ve prioritised paying some of your creditors over others, such as if you’ve chosen to pay back a family member over your bank, for example. If you’ve given away any assets you owned, or sold them for less than they were worth, you would need to declare this. Unfortunately, either of these things could scupper your application.
The official receiver makes the decision on whether to approve your DRO. You pay a £90 fee when you apply, and this isn’t refunded even if your application is refused. If you can’t raise £90, your debt adviser will be able to tell you if you’re eligible for help with this. You should get a decision on your application within 10 working days.
If your DRO is approved, the official receiver will contact all the creditors included in the DRO and tell them they can’t ask you to repay your debts to them for 12 months, although they may still send you statements. During this year, if your circumstances improve so that you could start repaying, you need to inform the official receiver who might end your DRO.
What are the alternatives?
There are other types of formal debt solution that might be more suitable for your situation, depending on how much debt you have. These include an individual voluntary arrangement (IVA), an administration order, or bankruptcy. You can also go down the route of a debt management plan (DMP), which is an agreement between you and your creditors to get your interest frozen so you can slowly pay off your debts in a manageable way. It’s not legally binding and doesn’t involve the courts.
But you should take professional advice — it’s free with debt charities — to find the right solution for you.
Image source: Getty Images
Hannah is an award-winning journalist with a background in the trade press. She writes about finance, asset management and business for Shares, Citywire, FE Trustnet, and interactive investor. Read more