Debt Relief Orders and bankruptcy can help you repay your unaffordable debt in a way that works for you, giving you a fresh financial start.
But while there are many similarities between them, there are also some differences that you should know about.
What is a Debt Relief Order?
A Debt Relief Order (DRO) is a solution that cancels or ‘writes off’ your debts if you’re not in a position to pay anything towards them. It typically lasts 12 months, during which time you won’t have to make any payments or deal with your creditors (the individuals and companies you owe money to) and all interest and charges will be frozen.
DROs are only available to individuals living in England, Wales, and Northern Ireland who meet certain eligibility criteria. They can only be managed by an authorised debt adviser known as an ‘approved intermediary’, who will submit your application on your behalf and communicate with your creditors for the duration of your arrangement.
There are certain rules you have to stick to during a DRO. Failure to stick to these rules can lead to you getting issued with a Debt Relief Restrictions Order (DRRO), which can see your DRO restrictions extended for another 15 years.
DROs are sometimes referred to as ‘mini bankruptcies’ as they work in a similar way, but tend to cause less damage to your finances in the long run.
To get a DRO, you must owe less than £50,000 in total, have assets worth less than £2,000, and have not had a DRO at any point in the last six years.
Which types of debt can be included in a Debt Relief Order?
The types of debt that can be included in a DRO are called ‘qualifying debts’. They include credit cards, overdrafts, loans, utility arrears, council tax, income tax, and hire purchase and conditional sale agreements.
In a DRO, you need to include all credit debts. If, for whatever reason, you leave out a debt, you won’t be able to add it at a later date and you’ll need to deal with it outside of your DRO. However, if the debt would have pushed your total debt over the £50,000 limit, your DRO could be cancelled and you’ll face legal consequences for failing to disclose all your debts.
Some debts can’t be included in a DRO and you’ll still be liable to pay them during your DRO. This includes student loans (old and new style), criminal fines, child support, and TV licence arrears.
Even if some of your debts can’t be included in the DRO, you’ll still need to disclose them to your debt adviser to give them a full picture of your financial situation.
How much debt do you have?
What is bankruptcy?
Bankruptcy is a formal insolvency procedure that allows you to write off the debts you can’t afford to repay. It lasts 12 months (called the moratorium period), during which time you’ll be protected from creditor contact, legal action, and interest and fees.
It is available to individuals in England, Wales, and Northern Ireland. In Scotland, bankruptcy is known as sequestration. There is a fee required to apply for bankruptcy (currently £680), which must be paid in full before your arrangement begins.
Once you’ve been declared bankrupt, you’ll need to hand over your money and assets to an ‘official receiver’ from the Insolvency Service. Their main role is to manage your estate during your bankruptcy and act as the primary point of contact between you and your creditors.
In some cases, your bankruptcy will be extended beyond the standard 12 months. However, this usually only happens if you don’t cooperate with your official receiver.
To be declared bankrupt, you must have debts of over £5,000 and be able to demonstrate that you have no spare income that you can use to pay them anything towards them. It’s also worth noting that bankruptcy in the UK is typically considered a last resort and only after other solutions have been ruled out due to the serious impact it can have on your finances.
Which types of debt can be included in bankruptcy?
Like a DRO, only certain types of debt can be included in a bankruptcy. This includes credit cards, utility arrears, overdrafts, personal loans, store cards, catalogues, and benefit overpayments (excluding those obtained by fraud).
Usually, you won’t be able to include any debts in your bankruptcy that were accrued after you were made bankrupt. However, if you forgot to include a debt that you obtained before you applied for bankruptcy, you should be able to include it at a later date.
The debts you can’t include and will still need to be dealt with separately include student loans, child support, court fines, and criminal fines. Despite this, you must still inform the official receiver of all your debts.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
Is a Debt Relief Order the same as bankruptcy?
Both DROs and bankruptcies work in a similar way, but they are not the same. We’ve outlined the key similarities and differences you should know about below:
Similarities
Duration
The length of time it takes to complete a DRO and a bankruptcy is 12 months. They will also both be visible on your credit file for six years, though the impact will differ slightly.
Remember, your DRO can be extended for another 15 years if you break the rules of your arrangement.
Included debts
DROs and bankruptcies can generally be used to deal with the same types of debt. What’s more, these debts will also be written off after your moratorium period comes to an end and you’re discharged from your arrangement.
Process
The process of applying for a DRO and bankruptcy is relatively similar. In both cases, your application will be checked by an official receiver and you’ll be protected from legal action.
Credit impact
Unfortunately, both a DRO and bankruptcy will be added to your credit report and impact your credit score for at least six years. This will have a knock-on effect on your credit rating and make it difficult to obtain credit.
Differences
Assets
During a DRO, you should be able to keep your assets as long as they’re not valued at more than £2,000. During bankruptcy, however, you’ll usually need to hand over all of your assets and they could be sold to recover the money you owe your creditors.
Homeowner status
DROs can only be used by individuals who do not own their homes – even if the property is in negative equity – while bankruptcy can be used regardless of whether you own or rent your home.
Fees
As of April 2024, there is no longer a fee required to apply for a DRO. Bankruptcy, however, requires a fee of £680 which must be paid by the time your arrangement begins.
Debt level
In the UK, you can only apply for bankruptcy if you owe at least £5,000. DROs, on the other hand, require you to owe less than £50,000.
How do I decide between a Debt Relief Order and bankruptcy?
There are various factors you’ll need to consider before deciding between a DRO and bankruptcy.
For example, if you own your home, bankruptcy will be your only option between the two. Similarly, if you have various assets that you want to keep, a DRO might be the better option for you.
Deciding between a DRO and bankruptcy is not the kind of decision that should be taken lightly. Always take the time to consider all your options and seek free debt advice if necessary.
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 other debt solutions are available?
The UK is home to various debt solutions, all with their own advantages and disadvantages. Here are some other debt solutions that you might be eligible for:
Debt Management Plan
A Debt Management Plan (DMP) is a way to deal with your unaffordable debts by making manageable monthly payments towards what you owe. It requires you to pay back 100% of your debt, meaning it can last anywhere from a few months to a few years depending on how much you owe.
A DMP might be right for you if you can afford your living costs and priority debts (e.g. rent arrears, council tax, and utility arrears) but are struggling to keep up with other debts like credit cards and loans.
Individual Voluntary Arrangement
An Individual Voluntary Arrangement (IVA) is similar to a DMP but is legally binding, which means that both you and your creditors will be legally bound to the terms and conditions of the arrangement and you’ll be protected from legal action. Once you’ve completed your monthly payments (typically after five to six years), any remaining debt will be written off.
An IVA might be right for you if you can afford to pay something towards your debts but not the full amount. It’s also better suited to individuals with debts of at least £10,000 due to the additional fees.
Conclusion
In the UK, there are many debt solutions that might be able to help you deal with your debts. However, knowing which is the right one for you can be easier said than done.
Both a DRO and bankruptcy work in a similar way in that they give you relief from your unaffordable debt for 12 months, but there are some key differences you should know about. For example, your homeowner status, minimum debts, and credit history all determine which option is more suitable for you.
Before entering into any debt solution, you must do your research and seek free debt advice to confirm you’re making the right decision for you.
