If you’re considering a Debt Relief Order (DRO) to help you deal with your unaffordable debt, it’s important you know what rules you’ll need to stick to for the duration of your arrangement. Like most debt solutions, you won’t be able to spend your money on whatever you like until you’ve successfully completed your arrangement.
But how exactly will your finances be dealt with in a DRO? And what kinds of rules will you need to follow to ensure your arrangement is a success?
This article will outline the DRO process in more detail, including what a DRO is, the eligibility criteria you’ll need to meet for a DRO, and what you can do to improve your credit score after a DRO.
How much debt do you have?
What is a Debt Relief Order?
A Debt Relief Order (DRO) is a legally binding debt solution designed to help you deal with the debts you can’t afford to pay back. They are primarily designed for individuals who are on a low income (£75 or less a month after essential costs), have a relatively low debt level (£50,000 or less), and have very few assets (worth less than £2,000).
DROs are often viewed as a simpler and cheaper alternative to bankruptcy as they offer a similar level of protection but without the need for court action or an application fee. Bankruptcy, on the other hand, costs £680 to apply and you’ll be asked to attend court if your creditor is petitioning for your bankruptcy on your behalf.
Most DROs last 12 months. During this time, you won’t be required to make any payments towards the debt and your creditors will be legally prohibited from contacting you or adding any extra interest and charges to your outstanding balance.
Once 12 months have passed, all the debts included in your DRO will be written off if your financial situation hasn’t improved. This also means that, if your income increases at any point, your DRO will be revoked and you’ll be asked to start making payments towards what you owe.
However, unlike other debt solutions, a DRO can only be set up and managed by an approved debt adviser or approved intermediary. Their job is to assess your income and expenses to determine if you’re a suitable candidate for a DRO and manage the first few stages of the arrangement.
How do I apply for a Debt Relief Order?
There is a certain process that must be followed when you apply for a DRO. We’ve outlined the basic steps below:
Contact a debt advisor
Before applying for a DRO, you must reach out to a specialist debt advisor (also called an approved intermediary). This is usually a debt advisor who has been given special permission to complete the relevant forms and advise you on financial solutions like DROs.
They will review your circumstances to determine if you’re a suitable candidate for a DRO or if another option would be a better match. It is also their job to ensure you are aware of the terms and conditions you’ll need to stick to, the impact on your finances, and the consequences of breaking the rules.
Complete your application
Once it has been determined that a DRO is right for you, your money advisor will work with you to complete your application. They will require information about your income, outgoings, assets (including savings), and debts.
It’s important to be open and honest with your debt advisor and provide them with all of the information they ask for. The application will then be sent to an ‘Official Receiver’ at the Insolvency Service, whose job is to review your details and decide whether your DRO will proceed.
Wait for an official decision
When the OR receives your application, they will look at all the information provided and make one of three decisions: make the DRO if they deem you eligible, defer the DRO and request further information or refuse the DRO because you’re ineligible or you provided false information.
If your application is rejected, you’ll be given a written explanation explaining why and you might be able to challenge the decision.
Start your arrangement
Once all the relevant steps have been carried out, your arrangement will officially begin.
From this point, you’ll need to adhere to certain rules for 12 months and your creditors will be prohibited from contacting you further or adding extra fees.
Which debts are covered by a Debt Relief Order?
DROs can be used for many different types of debt, including non-priority and priority debts. Some of the debts covered are credit cards, utility bills, overdrafts, personal and payday loans, income tax, money owed to friends or family, council tax, national insurance arrears, benefits overpayments, business debts, and hire purchase or conditional sale agreements.
This means that, if you have any of these debts, you should be able to include them in your DRO and will be discharged from them after 12 months as long as your financial situation doesn’t improve. However, if you accrued any of these debts by fraud – you’ll need to continue paying them after your DRO.
Many debts don’t contribute to the £50,000 limit, meaning you’ll still need to make ongoing payments towards them throughout your DRO. Examples of excluded debts are court fines, student loans, child maintenance, criminal fines, social fund loans, and compensation for death and injury.
If you have debts not covered by these rules or you just want to make sure all your debts are covered, your approved intermediary should be able to advise you. If a particular debt isn’t covered, you’ll need to pay it outside of the DRO.
It’s also worth noting that all your credit debts must be included in a DRO and if you forget to add any at the application stage, they can’t be added at a later date. Despite this, they must still be relayed to your DRO advisor because if any of the missed debts would take you over the £50,000 limit, your DRO could be revoked.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Am I eligible for a Debt Relief Order?
Before applying for a DRO, it’s important to do your research to ensure you meet the various eligibility criteria. We’ve outlined the different factors you’ll need to consider below:
- Income – Your disposable income must be less than £75 each month after your essential costs (e.g. rent and bills) have been met
- Debts – You will only be able to apply for a DRO if your total debt level is £50,000 or less (this recently increased from £30,000)
- Assets – Your assets and savings must be worth £2,000 or less to be eligible for a DRO
- Vehicles – Your car or motorbike must be worth £4,000 or less unless it has been adapted for a disability
- Residency – DROs are only available to individuals who have lived or worked in England, Wales or Northern Ireland in the last three years
- History – You can’t apply for a DRO if you’ve had one in the last six years and it’s still visible on your credit report (you can apply if the DRO was cancelled)
Remember, your debt advisor will review your financial situation for free to determine if a DRO is the right option for you. If another debt solution would better suit your circumstances, they will advise you of your options.
It’s also important to note that if you’re currently paying for a vehicle through a hire purchase agreement or conditional sale agreement, it will not be classed as an asset as you technically don’t own it outright until you’ve made your final payment.
Debt Relief Order expenditure allowances
When you apply for a DRO, your debt advisor will deduct your essential expenses from your total income to calculate your ‘allowable expenses’. Put simply, if a cost reflects a reasonable domestic need, it will be classed as an allowable expense and you’ll be allowed to keep using it as normal throughout your arrangement.
Some costs might be for something that’s usually classed as an allowable expense, but they are considered too high to be included. In some cases, you might be asked to pay for things that don’t constitute a basic need.
When you complete an application form, you’ll be asked to list how much you pay for certain expenses. The most common are housing, travel, food, housekeeping, energy and water, and utilities like TV and broadband.
Some of these expenses will be fixed (e.g. rent and bills) and should be fairly straightforward to work out, while others will fluctuate month to month and can be harder to calculate (e.g. food and travel). For these costs, look at how much you’ve spent each month for the past year and work out an average amount.
Once you’ve provided a statement of your expenses, your approved intermediary will discuss them with you and let you know whether they think they are too low or too high.
What rules must I follow in a Debt Relief Order?
During a DRO, you’ll be expected to follow certain rules to ensure your arrangement is a success. This includes:
- Getting further credit – If you want to apply for credit of £500 or more at any point during your arrangement, you must tell the lender that you’re in a DRO
- Owning a business – You can’t conduct business under a different company name without informing everyone involved of the business name you had when you got a DRO
- Promoting a business – You’re prohibited from being in any way involved with the promotion, management, or establishment of a limited company without court permission
- Acting as company director – You can’t take up the position of company director without permission from the court
What is a Debt Relief Restrictions Order?
If the advisor handling your DRO believes you have acted dishonestly, forgot to include certain debts, or done something you knew you shouldn’t have during your arrangement, they can apply to serve you with a Debt Relief Restrictions Order (DRRO).
Some of the situations in which you could be served with a DRRO include where you:
- Took on debts when you knew you couldn’t repay them
- Paid off some creditors in preference to others
- Failed to cooperate with the person handling your DRO
- Committed or attempted to commit fraud
- Failed to inform the OR about certain assets gained before or during your DRO
- Continued to run a business when you knew you couldn’t repay your debts
Will a Debt Relief Order affect my credit score?
Unfortunately, your DRO will be listed on your credit file from each of the main credit reference agencies (Experian, TransUnion and Equifax) for six years from the date it is approved. This means that, even if your DRO only lasts the standard 12 months, lenders will be able to see that you struggled with debt for another five years after you’ve been discharged.
It will also be added to an online database called the Individual Insolvency Register (IIR) until one month after your arrangement ends. This is essentially a digital record of all individuals in insolvency solutions in England and Wales but is usually only used by lenders, employers and landlords.
During this time, your credit score will be lowered and you’ll find it difficult to get approved for most types of credit, including a mortgage, loan, phone contract, and even a basic bank account. This is because it shows that you’ve struggled with debt in the last few years and are unlikely to be in a position to make payments towards another credit agreement.
What happens if I come into money during a Debt Relief Order?
If you come into money during a DRO, it’s important you follow a set procedure and inform the approved intermediary handling your arrangement as soon as possible. Failure to do so could result in your DRO being cancelled and all protections being lifted, meaning you’ll need to find another way to repay the debt.
Depending on how you handled the situation, you might also be subject to criminal or civil action. This might happen if you went out of your way to hide an inheritance or lump sum payment you received while in a DRO, for example.
Remember, a DRO is only valid if your financial situation remains unchanged for 12 months. This means that, if your income increases at any point during your arrangement, you’ll no longer meet the eligibility criteria and your DRO will be revoked.
Can I get a Debt Relief Order if I’m self-employed?
Being self-employed can make it difficult to list your income for a DRO – especially if it fluctuates month to month – but it’s still a possibility and can prevent you from needing to file for bankruptcy.
For example, while you can’t apply for a DRO if you’re a director of a limited company without court permission, you should be able to remain self-employed as a sole trader or in a partnership for the duration of your arrangement.
However, there may be extra restrictions placed on you if you’re self-employed, so you must seek free debt advice before applying. Even if you meet the eligibility criteria for a DRO, another debt solution might be better suited to your financial situation.
Can benefits be included in a Debt Relief Order?
If part of your monthly income is made up of benefits, they can usually be included in your DRO. Some of the other forms of income that can be included are your salary or wages, pension income, contributions from family members, and rental income.
Similarly, if you receive benefits to cover the additional needs that come with having a disability, they might be able to be offset against these costs. In other words, the amount of the regular payment is included in the application as well as being classed as an expense (e.g. under adult care costs).
Some examples of benefits that can be offset against care and mobility costs include Personal Independence Payment (PIP), Disability Living Allowance (DLA) and Attendance Allowance (AA).
Debt help tailored to you
From writing off a large portion of your debt, to readjusting your budget, we’ll find a solution that suits you.
How can I improve my credit score after a Debt Relief Order?
Being in a DRO – or any debt solution for that matter – will negatively impact your credit score for several years. However, there are various things you can do to improve your post-DRO credit score and get your finances back on track:
Register to vote
Registering to vote only takes a few minutes, but it can significantly improve your credit score and boost your financial standing, making it easier to get approved for credit – even if you don’t actually vote.
When you register to vote on the electoral roll (or electoral register), your details are added to your credit report. This makes it easier for lenders to verify your address and confirm you’re not committing fraud, which has a direct impact on your credit score.
The exact amount your credit score will increase can differ depending on other factors, but this simple task can see it boosted by up to 50 points.
Make payments on time
The single biggest contributing factor to your credit score is your payment history or, in other words, your ability to make payments in full and on time.
Once you’ve been discharged from a DRO, it’s crucial you keep up with all of your financial obligations as agreed to avoid further damage to your credit score. This includes your rent, bills, and other debts.
If you struggle to keep up with all of your payments, it’s recommended to set up automatic or recurring payments on your bank account. This will ensure that all your payments are made on time each month, even if you forget.
Avoid further credit
Unless you have no other option, it’s not advised to enter into another credit agreement shortly after exiting a DRO. This can make lenders think that you’re still struggling financially and are dependent on credit to get by.
Missing payments on another credit agreement will cause further damage to your already damaged credit score, which will make the journey to a healthier financial future even more difficult and time-consuming than it already is.
Remember, you’ll likely struggle to get approved for credit for several years after your DRO ends.
Conclusion
Debt Relief Orders (DROs) are a type of debt solution that can give you protection from your unaffordable debts before writing them off for a fresh financial start. They are primarily designed for individuals with low debt levels and few assets and are often viewed as a simpler and cheaper version of bankruptcy.
When you enter into a DRO, you’ll be expected to stick to certain rules and limit your spending on some expenses. This is to ensure your DRO runs smoothly and you’re able to be discharged from your debts as expected after 12 months.
If you come into money during a DRO, you must inform your DRO advisor as soon as possible who will instruct you on your next steps. Failing to keep them updated can result in extra restrictions being placed on you or your DRO being revoked.
