If you have debt you cannot pay, which is of a relatively low level, and few assets, a debt relief order (DRO) could be the most convenient way to write off your debts and avoid bankruptcy.
Providing you are not a home owner and have debts of less than £20,000, a DRO can help you clear a path to a debt-free future. It is a great debt management solution if you’re short on spare income, but there are caveats to DROs and not all debts are eligible. Read on to find out more.
What debts are covered by a DRO?
A DRO lasts for twelve months, during which time you won’t have to pay anything towards your debts. After that period, your arrears will be written off. Debts which are eligible for a debt relief order are known as ‘qualifying debts’. Here are the most notable:
- Hire purchase agreements
- Overdrafts, credit cards and loans
- Utility bill arrears (includes council tax and income tax)
- Buy now, pay later schemes
- Business debts
- Rent arrears
If you enter into a DRO for any of the above, the respective creditors will not be allowed to chase you for repayments. The exception to the rule is rent, because landlords are still within their right to take action against you in order to retrieve their property.
Would I be eligible for a DRO?
Debt relief orders are relatively easy to obtain, but there are some important eligibility criteria you’ll need to bear in mind:
- You must have debts totalling no more than £20,000
- You can’t be a homeowner
- If you own a car, it mustn’t be worth more than £1,000 (unless it has been specially adapted due to a disability)
- You haven’t had a DRO in the last 6 years
- You’re not going through any other form of insolvency
- You’ve lived or worked in England within the last 3 years
- Your surplus income must not exceed £50 month after paying essential personal and household spending.
How much will a DRO cost?
Like all forms of debt management, DRO comes at a cost. The good news is, it’s relatively low; the Insolvency Service will charge a one-off fee of £90 to process your debt relief order application. This can be paid in one lump or in instalments over 6 months but is non-refundable; you won’t get it back if your DRO is denied.
Is a DRO right for me?
Debt relief orders are a way out of debt, but getting one will impact your credit rating and may have an effect on your lifestyle, so it needs careful consideration before taking the plunge. For example, if any of your debt relates to something bought on hire purchase (a car, for example), you may have to give it back.
A DRO stays on your credit file for 6 years. That’s a long time, and it may make it difficult for you to obtain further credit when you need it – for example if you want to become a homeowner in the future.
DROs have certain rules. Have a read through the following and consider whether or not this form of debt management is right for you:
- Once you’ve entered into a DRO, you can’t borrow more than £500 without telling the creditor about your DRO
- If you take out a DRO, you won’t be able to get involved in running a limited company or become a company director without seeking permission from the court
- During the 12 month DRO period (and for three months afterwards), your details will appear on the Individual Insolvency Register. This can be viewed by anyone
Debt relief order – benefits
- A DRO can be be a far lower cost alternative to bankruptcy if you owe less than £20,000
- Your debts will be written off after 12 months and during that time you won’t have to pay anything towards them
- DRO is a formal debt solution, but you don’t have to appear in court to be granted it
- During the 12 month DRO period, your creditors are not allowed to pursue you
Debt relief order – negatives
- If you live in England or Wales and owe more than £20,000, a DRO will not be an option
- If you own your home, you will not be eligible for a DRO
- Although you’ll be free of debt payments for 12 months, you’ll need to pay the Insolvency Service a one-off £90 fee to get started with a DRO
- Your credit report will still be negatively affected by a debt relief order