Debt relief orders (DROs)

A debt relief order (DRO) is an alternative to bankruptcy, and a cheaper option for those who meet the requirements of debts below £20,000 and few assets. In common with bankruptcy, it is a form of insolvency, which means it will be on record on the Insolvency Service register. Your creditors cannot take action against you for 12 months and after 12 months your debts are written off.
UpdateFrom October 2015, the maximum amount of debt allowed for a DRO was increased from £15,000 to £20,000 and the allowed amount of assets from £300 to £1,000.

What is a DRO?
A DRO is a form of insolvency that can leave you debt-free after 12 months, aimed at non-homeowners with few assets and debts under £20,000.
A DRO should not be seen as an easy way to get out of debt. It can affect your ability to obtain credit and your chances of finding some forms of employment and even finding a place to rent. In certain circumstances, a DRO could affect your current job or tenancy.

If you are in debt, there may be other options for dealing with your debts which you should consider before deciding on any form of insolvency, including a DRO. These could be things like:

  • A debt management plan (DMP) where you pay a certain amount every month and this is proportionally distributed between all your creditors.
  • Informal repayment agreements or token payments.
  • Challenging debts using the Consumer Credit Act. If most of your debts are credit cards, loans and catalogue accounts you took a long time ago, it is worth exploring this option.
  • Lump sum offers to settle your debts for a reduced amount.
  • Help from friends and family, if you are going through a bad patch.
  • A mixture of the above.

To qualify for a DRO you must meet the requirements.

Criteria

  • Your debts should be less than £20,000 at the time the application is approved.
  • You should not be a home owner.
  • The total value of your assets (excluding a car or motor bike) should be less than £1,000. Lots of basic household items such as cutlery, crockery, cookers, televisions, beds or furniture do not count as assets. The value of your assets is calculated based on resale value, not how much the item was worth when you bought it, unless it is brand new.
  • This means that most pensions will not affect your asset limit. A small number of private pensions not approved by HMRC will still count as assets. Money you receive from a pension will be treated as income when deciding whether you qualify for a DRO.
  • The value of your car or motor bike should not exceed £1,000 – an exception can be made if your vehicle has been adapted due to a disability.
  • Your spare monthly income after normal household expenses should be less than £50 a month.
  • You must have lived in England or Wales (or run a business in England or Wales) for the last three years.
  • You shouldn’t have been subject to a DRO in the last six years.
  • You must not be involved in any other form of insolvency procedure, such as:
  • an undischarged bankruptcy order;
  • a current individual voluntary arrangement (IVA);
  • a current bankruptcy restrictions order (BRO) or undertaking (BRU);
  • a current debt relief restrictions order or undertaking (DRRO or DRRU);
  • an interim order.
Advantages and disadvantages
  • Advantages
    • Creditors cannot take action against you, no need to respond to court claims or deal with bailiffs
    • No harassment from creditors
    • Debts written off after 12 months
    • Quicker resolution than waiting for debts to go statute barred
    • Cheaper than bankruptcy.
  • Disadvantages
    • A DRO appears on the public insolvency record for 12 months and on your credit file for six years
    • Can affect current and/or future employment prospects
    • Can affect current and/or future tenancies
    • Difficulty opening a bank account
    • Need court permission to act as company director
    • Certain restrictions may be attached to a DRO.
What debts can be included?
  • The following debts can be included
    • rent arrears, however, your landlord can still take action to evict you, even if the rent arrears are included in your DRO;
    • utility bills (gas, electricity, water);
    • phone bills;
    • council tax, business rates and community charge arrears;
    • income tax, VAT and National Insurance arrears;
    • credit cards and store cards;
    • overdrafts and loans (loans from banks, payday lenders and doorstep lenders);
    • catalogue accounts;
    • benefit overpayments (excluding loans from the social fund);
    • family and personal debts;
    • hire purchase and conditional sale agreements if you are in arrears (if you are not in arrears you may be able to exclude this type of debt in certain circumstances);
    • hire agreements;
    • parking penalty charges;
    • mortgage shortfalls (money you owe if your house was sold for less than the outstanding mortgage);
    • small business debts such as money owed to employees and suppliers and debts to clients who have paid for goods and services you were unable to supply.
  • The following debts cannot be included
    • magistrates’ court fines;
    • child support and maintenance payments;
    • student loans;
    • social fund loans (budgeting and crisis loans);
    • any obligation arising under a confiscation order made under section 1 of the Drug Trafficking Offences Act 1986 or section 1 of the Criminal Justice (Scotland) Act 1987 or section 71 of the Criminal Justice Act 1988 or under Parts 2, 3 or 4 of the Proceeds of Crime Act 2002;
    • any liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other duty, or to pay damages under Part 1 of the Consumer Protection Act 1987 in respect of the death of personal injury to anybody
    • secured debts – a DRO does not affect the rights of secured creditors, however, if you own property, you are unlikely to qualify for a DRO, as your assets are likely to exceed £1,000.
Debts that cannot be included will not count towards the £20,000 limit and you will still have to repay them in full. You should list them on your application and make allowance for their repayments in your outgoings.
If your debts are higher than the amounts stated on the form, for example, because a creditor has added interest or charges, the official receiver will only include the amount of debt that you have stated on the application form in the final DRO. You should provide accurate information, otherwise the creditor could ask you to pay the difference.
If a debt is left out, it cannot be included and the creditor can continue to take action against you. This means you may need to arrange payments or consider an alternative if applicable. If this debt takes your total debts over £20,000, the official receiver will consider ending or revoking your DRO.
If you do not tell the official receiver about the extra debt, the official receiver may be able to take criminal and/or civil action against you.
How to apply for a DRO
  • money adviceYou can only apply for a DRO through an approved intermediary.
  • The intermediary will check your eligibility and apply on your behalf. Applications are sent directly to the Insolvency Service without a court hearing.
  • A £90 fee is payable to process the application. There is no reduction if you are on a low income or on benefits, however, you can pay this in installments.
  • Payment options depend on the intermediary processing your application and there may be a waiting time of several weeks.
  • You should ensure that your debts remain below £20,000 while you wait.
  • You should make sure the information on your application is correct and up to date at the time of submission.

Approved intermediaries

shredded paperThere are certain things you must not do before you apply for a debt relief order or during the debt relief order. If you are found guilty of doing any of these things, you will be committing an offence.

  • Hiding, destroying or faking books or documents up to one year before you apply for a debt relief order and during the debt relief order period;
  • Not telling the Official Receiver of any change in your circumstances that would affect your application between making the application and the order being granted;
  • Giving away or selling things of value for less than they’re worth to help you qualify for getting a DRO.
Any of these actions can lead to the refusal of the DRO or a debt relief restrictions order or undertaking (DRRO or DRRU). In more serious cases, you could face criminal charges for fraud and even be sent to prison.
The process

Before you apply for a DRO you will need to do the following:

  • budgetGet advice so you can establish eligibility.
  • Do a budget sheet to assess your income and expenditure.
  • Get details about all your debts and how much you owe each creditor. Check your credit file to make sure you have included all debts.
  • Start saving up money towards the application fee.
If your debts are near the £20,000 mark at the time of your application, they may rise above £20,000 during the time it is processed. This will result in your application being rejected.

Consider the following:

  • card stashYou may have a credit card or a store card which has a high interest rate that is building up each month.
  • If you haven’t got the money for the fee, you may miss your chance to apply for a DRO if your debts increase to more than £20,000. You may be able to ask a charity for help with the fee to speed up the process.
  • Try to persuade your creditors to freeze the interest.
  • If you are able to do so, you could make payments to prevent the debts reaching the £20,000 limit. Be careful to treat all your creditors fairly if you decide to do this.
  • You could get some help with repayments from friends and family while you sort out your DRO.

After your application has been submitted

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  • The official receiver will decide whether to grant your application for a DRO.
  • They can ask you for more information and you must be as helpful as you can. You may want to seek more advice if this happens.
  • If you own a car or motorbike, then your adviser will need to check the value using Parker’s Guide. If it is worth less than £1,000, then it will not be taken into account as an asset. This limit may be higher if your car is adapted due to disability. Don’t include a car you have on a hire purchase or conditional sale agreement as an asset. The car belongs to the creditor until you have paid off the total debt. Don’t forget to count the balance you owe in your list of debts.
  • The official receiver will also ask a credit reference agency for information about your credit file. This will help them to check the details that you have provided in your application.
  • If the official receiver approves your application, they will send you a letter to confirm that you have been given a DRO.
  • The official receiver will also send the order to all the creditors listed in your application. Your creditors may object to the DRO being made. They can also object to being included in the DRO or to the details of their debt as listed in the DRO. They can only make such objections on certain grounds, for example that you are not eligible for a DRO. It is not a valid ground for a creditor to object just because they don’t want to be included in the order.
  • If your DRO stands, all the debts that are included in the order are put on hold for 12 months. This is called the ‘moratorium period’. You should not usually make any more payments on your debts. There are some exceptions to this rule (for example in some situations if you have rent arrears).
  • Your creditors that are included in the order are not usually allowed to ask you to make any more payments. If this happens, tell the creditors about your DRO and let the official receiver know.
  • If your application is rejected, the official receiver will tell you and your intermediary the reasons.

What you should tell the official receiver

  • If there are any changes in your circumstances after your application is submitted.
  • You must give information about your finances to the official receiver if they ask.
  • Make sure you have given the official receiver a full list of your debts and assets.
  • If your income increases, or if you come into any property or a lump sum whilst you have a DRO.
  • If you change your address.
If the official receiver finds out that you have not given them accurate information about your income, assets or debts, your DRO can be revoked and, in some cases, they can take criminal or civil action against you.
Restrictions

Restrictions placed by the DRO:

Credit-Card-with-Chains-and-Lock

  • If you wish to obtain credit of £500 or more, either alone or jointly with another person, you must first tell the lender that you are subject to a DRO. This restriction applies to borrowing money, and also to getting credit by acting with the intention of getting it, even though you have not entered into a specific agreement for it. This would include, for example, ordering goods without requesting credit but then failing to pay for the goods when they are delivered.
  • If you carry on a business (directly or indirectly) in a name that is different from the name under which you were granted a DRO, you must first tell all those with whom you do business the name under which you were granted a DRO.
  • You may not be involved (directly or indirectly) with the promotion, management or formation of a limited company, and may not act as a company director, with out the court’s permission.
  • You will not be eligible to apply for a DRO again for 6 years.
  • You are permitted to open a new bank or building society account after the granting of a DRO. However, the bank or building society may require you to disclose that you are the subject of a DRO. It may then decide whether or not to permit you to open an account, and whether to impose any conditions or restrictions on the use of the account. You must also tell the bank or building society that you are subject to a DRO before you apply for any overdraft facilities.
  • If you are subject to a DRO you must not write cheques that are likely to be dishonoured (bounce).

The official receiver can apply for a Debt Relief Restrictions Undertaking (DRRU) if:

  • If the official receiver decides that you have been dishonest before or during your DRO or that you are otherwise to blame for your position, they ask you to agree to a DRRU (Debt Relief Restrictions Undertaking). An undertaking is an agreement to do or not to do something. A DRRU has exactly the same effect as a DRRO, but if you enters into a DRRU you will not have to attend a court hearing. The period of restrictions is likely to be shorter than if the court made a DRRO. You would be able to put their comments to the official receiver who may further reduce the period if they decide this would be reasonable.
  • If an undertaking cannot be agreed or you refuse, they may apply to the court for a DRRO (Debt Relief Restrictions Order). The court may make an order against you for between 2 and 15 years, and this order will mean you continue to be subject to the restrictions of a DRO, as described above. Your details will also be kept on the Individual Insolvency Register for the lifetime of the order plus an extra three months.
  • If you incur new debts after the DRO, this could result in a bankruptcy order or prosecution if, when you incurred debts, you did not disclose that you were subject to a DRO.

Debt Relief Restrictions Order (DRRO)

When deciding whether to grant a DRRO, the court may take into account your conduct before and after the date of the debt relief order, so the official receiver will look closely at all conduct. Below are some examples of conduct that the official receiver could use as evidence in their report:

  • incurring debts that a person knew they had no reasonable chance of repaying;
  • giving away assets or selling them at less than their value;
  • deliberately paying off some creditors in preference to others;
  • gambling or making rash speculations or being unreasonably extravagant;
  • failing to keep or produce records that would explain a loss of money or property;
  • fraud, or fraudulent breach of trust;
  • failing to cooperate with the official receiver;
  • causing debts to increase by neglecting business affairs;
  • failing to supply goods or services that have been paid for;
  • carrying on a business when the person knew or ought to have known that they could not pay their debts.
DROs deal with your debts at the date the DRO was approved. If you incur new debts, this could result in: a bankruptcy order and prosecution if you did not disclose that you were subject to a DRO.
Hire purchase agreements

Coin piles over red car

  • If you are not in arrears with your hire purchase (HP) or conditional sale agreement, you can choose to exclude the debt from your DRO application. However, if you are in arrears, you must include it. Any further payments to the creditor must stop. Some hire purchase or conditional sale agreements may contain a clause which allows your creditor to end the agreement if you get a DRO.
  • If you are not in arrears, you may decide to leave out your HP or conditional sale agreement from your DRO. If you do this, future payments towards the agreement will only be allowed if the item is necessary to satisfy the basic domestic needs of you and your family. Otherwise, if you want to keep the item, payments under the agreement would need to be made by a third party, such as a family member or friend.
  • If you have a vehicle on a HP or conditional sale agreement and it is worth more than £1,000, payments would not be an allowable expense in your DRO. Therefore, you would have to include the debt in your application unless a third party is willing to take over the agreement for you.
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