If you have debts of less than £50,000 that you can’t afford to keep up with, a Debt Relief Order (DRO) might be able to help you write them off. But what exactly is a DRO? And is it the right debt solution for you?
DROs are a popular alternative to bankruptcy as they offer the same protections but with less of an impact on your finances.
However, there are still various restrictions you’ll need to abide by to ensure your DRO is successful.
This article will outline the DRO process in more detail, including how to apply for a DRO, how a DRO affects your credit score, and what restrictions you have to follow during a DRO.
What is a Debt Relief Order?
A Debt Relief Order (DRO) is a debt solution that stops all creditor contact and legal action and writes off your personal debts after 12 months if your circumstances don’t improve.
It is designed to give you a temporary break from your debts so you can breathe easier and focus on improving your financial standing.
During a DRO period (sometimes called a moratorium period), your creditors won’t be able to contact you about the debt or take legal action against you.
This includes sending bailiffs to your home or serving you with a court order to force you to hand over payment.
They also can’t add extra interest or fees, meaning that your balance will remain the same for the duration of your DRO.
The kinds of qualifying debts that can be included in a DRO include personal loans, rent arrears (in some cases), credit cards, catalogues, overdrafts, income tax, and conditional sale agreements.
Once the moratorium period is over, the debts included in your DRO will be written off and you’ll be free to start afresh as long as your financial situation hasn’t improved.
This also means that, if your financial situation improves at any time, your DRO will be revoked and you’ll be required to start making payments towards the debt.
However, while your debts will be paused during your DRO, you’ll still need to keep up with any ongoing financial obligations, such as crisis loans, student loans, rent or mortgage payments, and utility bills.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
How do I apply for a Debt Relief Order?
The DRO application process differs from other debt solutions. So if you’re considering a DRO, it’s important you know what to expect.
We’ve outlined the main steps you should follow if you want to apply for a DRO below:
Contact an approved debt advisor
Unlike other debt solutions that you can apply for yourself, you must contact an approved debt advisor (sometimes called an approved intermediary) before you can apply for a DRO.
They will carry out a full review of your financial situation and discuss all your available options to ensure a DRO is suitable for your circumstances.
In most cases, a DRO will be right for you if your debts don’t exceed £50,000, your assets are worth less than £2,000, and your disposable income works out at less than £75 a month.
Complete your application
The next step in the application process is working with your approved debt advisor to complete your application.
This will primarily involve calculating your monthly income and outgoings and adding up your total debts to work out how much money you have left over at the end of each month.
In a DRO, all your credit debts must be included.
Once your application has been completed, it will be sent to the ‘Official Receiver’ (OR) at the Insolvency Service.
This is an officer of the court to which they are attached or, as they are sometimes referred to, the government’s version of an Insolvency Practitioner (IP).
Await a decision
The OR has 10 working days to reach a decision. They can make one of three decisions: issue the DRO, defer the DRO while they request more information, or refuse the DRO.
There are several reasons why the OR might refuse your DRO. The most common are that you don’t meet the eligibility criteria, you failed to provide further information when requested, or the OR believes you have been dishonest in your application.
Start your arrangement
From the moment your DRO begins, you’ll be protected from creditor contact, legal action, and interest and fees.
If 12 months pass and your financial situation hasn’t improved, you’ll be discharged from your DRO and all the included debts will be written off. It’s important to note that you won’t be informed that your DRO has concluded – it will automatically end 12 months after it begins.
How does a Debt Relief Order affect my credit score?
Unfortunately, a DRO will appear on your credit reference file and have a negative impact on your credit score for six years from the date it starts.
During this time, lenders will be able to see that you’re in a DRO when you try to obtain credit and you’ll find it difficult to get approved for anything from a personal loan to a mortgage.
This is why it’s generally advised to wait until after a DRO has been removed from your credit record before applying for further credit.
Similarly, if you want to borrow £500 or more during your moratorium period, you must let the lender know that you have a DRO, which might impact their decision to enter into a credit agreement with you.
This is because a DRO indicates that you’ve dealt with debt recently and could potentially struggle to keep up with another monthly payment on top of everything else.
So if you’re planning to buy a home or take out a loan in the next six years, you’ll likely face some difficulty.
In addition to your credit record, your DRO will also be visible on the Individual Insolvency Register (IIR) for six years.
This is an online database of all individuals in certain insolvency solutions in England, Wales and Northern Ireland. Scotland has its own version, which is known as the Register of Insolvencies (ROI).
How much debt do you have?
What Debt Relief Order restrictions do I have to stick to?
During a DRO, there are certain restrictions you’ll need to abide by to ensure your arrangement is a success and you’re discharged from your debts on the expected date.
We’ve outlined the main rules you should know about below:
Borrowing ability
As previously mentioned, you must inform lenders that you have a DRO if you’re applying to borrow more than £500.
This is to ensure they are well informed of your financial situation before entering into a credit agreement with you.
Once they are aware of your DRO, they might decide to impose higher interest rates or stricter terms to balance the extra risk.
Career limitations
During a DRO, there are certain things you won’t be able to do in relation to your job. For example, you’ll be prohibited from setting up, managing, or promoting a limited company and being a company director without permission from the court first.
In addition, you can’t continue running a business under another name without disclosing that your former business had a DRO.
Can creditors still contact me during a Debt Relief Order?
The Consumer Credit Act (1974) states that while your creditors can’t make requests for payment during your DRO, they might continue to send you annual statements and default notices.
Some of the other instances in which your creditors might contact you during your DRO are if you create a controlled goods agreement with a bailiff, you have unpaid debts not included in the DRO, or if your landlord wants to create a payment plan with you or take action to repossess your home due to rent arrears.
However, because a DRO writes off your debts, any communication should cease after 12 months when you’re discharged from your arrangement.
How will a Debt Relief Order affect my job?
Depending on your role and the industry you work in, a DRO might directly affect your job.
For example, if you work in the finance or legal sector, your employment contract might contain a clause that prevents you from being insolvent.
This means that, if your job requires you to handle other peoples finances, you might need to change roles or find another job in a different industry.
If you’re worried about whether a DRO will directly affect your job, it’s important to contact your HR department or speak to a member of a professional body or trade union before starting the application process. Most jobs will remain unaffected, but rules can differ depending on the individual employer.
Remember, a DRO will also be listed on the IIR for six years from the date it starts. So if you apply for a new job, a potential employer will be able to search for this information and might use it to determine whether or not to offer you the position.
How will my bank account be affected in a Debt Relief Order?
Like most debt solutions, there is a chance that your bank account will be frozen if any of the debts included in your DRO are with your bank.
Even if the debts are not with your bank, your account is still at risk of being closed and it’s worth checking the terms and conditions of your current account to find out if this is the case before entering into a DRO.
Because of this, it’s sometimes recommended to open a new account with a different bank after your DRO has been approved.
This can allow you to start afresh knowing your money is protected. Some banks will ask if you have any existing debt solutions before deciding whether to let you open a new account and you must disclose you have a DRO.
What is a Debt Relief Restrictions Order?
If the OR believes you purposely made your financial situation worse before applying for a DRO, acted dishonestly during the DRO application process, or broke the rules during your DRO, they might ask the court to file a Debt Relief Restrictions Order (DRRO) against you.
Debt Relief Restrictions Orders (DRROs) are a type of court order that extends the existing restrictions of a DRO or adds new restrictions for an additional two to 15 years.
If you still don’t comply with the new restrictions, you will be committing an offence and could be fined or sent to prison.
However, before a DRRO is made, the OR will contact you and inform you of their intention to apply for a DRRO and ask you to attend a face-to-face interview with your local OR.
During the interview, you’ll be given the opportunity to explain your point of view and provide evidence that could help you argue your case.
Once the interview has concluded, one of two outcomes will be handed down to you: no further action will be taken or a DRRO will be applied for.
What is a Debt Relief Restrictions Undertaking?
If you receive notice of a potential DRRO and you agree with the OR’s reasons, you can agree to something called a Debt Relief Restrictions Undertaking (DRRU), which has the same legal effect as a DRRO but typically involves a shorter restriction period and doesn’t require a court hearing.
Debt Relief Restrictions Undertakings (DRRUs) are designed to provide a more lenient sentence for individuals who have accepted responsibility for their actions and save money on court costs. In most cases, you can also negotiate the terms of your DRRU with your OR.
How are my assets dealt with in a Debt Relief Order?
Before you apply for a DRO, your money advisor will assess your financial situation, including your income, debts, and assets, to determine if you meet the eligibility criteria or if another debt solution would be better suited to your circumstances.
Put simply, you must have assets worth £2,000 or less for a DRO. This includes vehicles worth over £4,000, electronics, jewellery, computers, buildings or land, mobile phones, as well as any disposable cash, shares, and savings.
However, some assets are exempt from a DRO. This includes bedding, clothing, furniture, tools or books you need for work, and disability vehicles and vehicles on hire purchase agreement.
Most kinds of pension funds are exempt (unless you can access the money now), but you must check with your money advisor to find out if your particular pension fund is included.
What are the advantages of a Debt Relief Order?
It’s important to familiarise yourself with the various advantages of a DRO before applying. We’ve outlined the main pros below:
It’s cheaper than bankruptcy
It only costs £90 to apply for a DRO, which is much cheaper than the cost of filing for bankruptcy (currently £680).
Depending on your financial situation, the £90 can be paid upfront or in instalments.
However, the instalments must be fully paid before you can be discharged from your DRO.
Your debts are written off
Unlike some other debt solutions where you must make monthly payments until you’ve repaid your debt in full, your outstanding debts will be written off after 12 months with a DRO if your financial situation doesn’t improve.
This will leave you free to make a fresh financial start.
You’ll be protected from your creditors
During a DRO, your creditors will be legally prohibited from requesting payment or taking legal action against you in an attempt to get you to pay.
With no pressure from the people you owe money to, you can focus on rebuilding your financial future.
It only lasts 12 months
Once your DRO has been approved, you’ll only have to wait 12 months until you’re discharged from your arrangement.
Compared to some other debt solutions – such as an Individual Voluntary Arrangement (IVA) which lasts five years, this can allow you to deal with your debts much quicker.
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.
What are the disadvantages of a Debt Relief Order?
While there are many advantages of a DRO, it’s worth familiarising yourself with the potential drawbacks. We’ve summarised the main cons below:
It can be difficult to qualify
The eligibility criteria for a DRO are stricter than some other debt solutions, making it difficult to qualify.
For example, you won’t be eligible if you’re a homeowner and have assets worth over £2,000.
You’ll have to stick to strict restrictions
During a DRO, there are strict rules you must abide by to ensure your arrangement is a success.
Furthermore, if you’re dishonest or provide false information, the restrictions placed on you can be extended for up to 15 years.
Only certain debts can be included
Only certain debts can be included in a DRO, such as credit cards, personal loans, overdrafts, catalogues, and utility bills.
Some of the debts that can’t be included are court fines, student loans, and child maintenance payments.
Is a Debt Relief Order right for me?
Before applying for a DRO, it’s important to check you meet the various eligibility criteria.
When you contact an approved debt advisor, they will review your financial situation and let you know if you’re a suitable candidate or if another solution would be better suited to your circumstances.
Generally, a DRO will be right for you if
- You if you have multiple debts you’re struggling to afford
- You’re on a low income with few assets
- You have less than £75 left each month after essential household costs
- You’re not a homeowner
- You haven’t had a DRO or been made bankrupt in the last six years
Similarly, if you qualify for bankruptcy but want a debt solution that has less of an impact on your finances, a DRO might be the right option for you.
Conclusion
A Debt Relief Order (DRO) is a way for individuals to write off the debts they can’t afford to pay by pausing all creditor contact, legal action, and interest and fees for 12 months.
During a DRO, you’ll be faced with certain restrictions designed to ensure your arrangement is a success.
For example, you won’t be able to borrow more than £500 without informing the lender of your DRO or act as the director of a company.
Before applying for a DRO, it’s important to familiarise yourself with what is expected of you. Failure to stick to the rules imposed on you could result in your DRO restrictions being extended for up to 15 years.
