A Debt Relief Order (DRO) is a formal debt solution that gives you temporary relief from your unmanageable debt for a set period before wiping it clean. It can be an effective way of dealing with the debts you can’t afford to repay, but it can affect your credit history for several years.
Even if you’ve just embarked on your debt repayment journey with a DRO, it can be useful to think ahead to the future and wonder what your finances might look like after you’ve completed your arrangement.
How much debt do you have?
What is a Debt Relief Order?
A Debt Relief Order (DRO) is a formal insolvency procedure that gives you protection from the people you owe (your creditors) for a set period before writing off all included debts. During a DRO – which typically lasts 12 months – your creditors will be prohibited from collecting payment, adding extra interest or charges, and taking legal action against you.
This time is sometimes referred to as a ‘moratorium period’, which is essentially an agreed period where you don’t need to make payments towards your debts because you’re actively doing something about them.
Once 12 months have passed, you’ll be discharged from your DRO and will be free to move on from your unaffordable debt. It’s important to note that the date you’re discharged from your DRO won’t necessarily mark the end of its impact on your finances.
DROs can be used to deal with a wide range of debts, including personal loans, credit cards, income tax, conditional sale agreements, overdrafts, council tax, utility arrears, and benefits overpayments – these are called qualifying debts. However, they can’t be used for student loans, court fines, and child maintenance arrears.
It’s important to note that while rent arrears can be included in a DRO, the existence of a DRO won’t prevent your landlord from evicting you from the property. Therefore, if you want to stay living there, you might need to continue paying your rent arrears after the DRO has been made.
How do I apply for a Debt Relief Order?
There are certain steps you must follow if you want to apply for a DRO. We’ve outlined the standard application process below:
Find an approved debt advisor
Unlike other debt solutions, you can’t apply for a DRO on your own and must start the process with an authorised debt adviser (also called an ‘approved intermediary’).
They will take the time to review your financial situation (e.g. income, expenses, and debts) and discuss all your available options to determine if a DRO is the right solution for you.
Complete your application
Once it has been determined that a DRO is right for you, your approved debt advisor will work with you to complete your application. This will require your full contact information, household income, creditors, and debts.
They will then submit your application to an ‘Official Receiver’ (OR) at the Insolvency Service, who is an officer of the court authorised to manage the initial stages of an insolvency solution, like a DRO or bankruptcy.
Await a final decision
The OR will receive your application and vote on whether or not to approve your DRO.
They will make one of three decisions: approve the DRO because you’re eligible, defer the DRO and request further information, or refuse the DRO on the grounds that you’re ineligible or provided false information.
Start your DRO
Once your DRO has been approved, you – and all the creditors included – will be notified as soon as possible and you will begin your arrangement.
It’s important to note that while all DROs last 12 months, you won’t be informed when your arrangement ends. It can therefore be useful to make a note of when your DRO starts and count forward 12 months.
How much does it cost to apply for a Debt Relief Order?
The rules around DROs changed in June 2024, making it easier for those on a low income and with higher debt levels to access the financial help they need.
One of the biggest changes was the removal of the £90 application fee, which could have been paid in full or in instalments and was non-refundable regardless of whether the application was successful. The maximum debt level was also increased from £30,000 to £50,000 and the value of an exempt vehicle rose from £2,000 to £4,000.
However, these new eligibility rules only apply to DROs taken out after June 28, 2024, and won’t impact any DROs taken out prior to this date.
How does a Debt Relief Order affect my credit history?
The moratorium period on a DRO might only last 12 months, but it can negatively affect your credit history for much longer. We’ve outlined the various ways a DRO will affect your credit history below:
It will lower your credit score
From the date you start your DRO, it will be added to your credit file from all of the main credit reference agencies (Experian, TransUnion, and Equifax) for six years. This will lower your credit rating and make lenders wary of entering into a credit agreement with you.
There is no fixed amount your credit score will drop when you enter a DRO, but you should expect to lose around a few hundred points.
It can make borrowing a challenge
Because your DRO will be visible on your credit file for six years, lenders will be able to see that you struggled with debt for up to five years after your arrangement ends and could use this information to decide whether or not to lend to you.
In most cases, evidence of a DRO will make it difficult to get approved for a loan, mortgage, phone contract, or bank account as it proves that you’ve struggled to meet your financial obligations in the past and could default on future credit agreements.
It can be difficult to move home
If you want to move while you’re in a DRO, you’ll find it difficult to find a mortgage provider willing to give you a mortgage or a landlord happy to rent a property to you. This is because a credit check is typically required for both of these processes and a DRO will show up on your credit reference file.
DROs are also added to a public register called the ‘Individual Insolvency Register’ (IIR) until three months after the moratorium period ends. This is an online database of all individuals in insolvency solutions in England, Wales and Northern Ireland.
“No fuss, just simple, honest advice. Communication is good and they make the process as easy as they can.”
What happens to a Debt Relief Order after 6 years?
As previously mentioned, a DRO will stay on your credit report for six years from the date it starts. After this, any evidence of the DRO will be removed from your credit file and you’ll be free to move on from your debts and start rebuilding your credit score.
However, you won’t receive any official notification that your DRO period has ended or that you’re no longer bound by the terms and conditions of your arrangement. The only way to find out when your DRO is due to end is to check the date it started on your entry on the IIR.
Remember, credit reports are based on the last six years of borrowing history. So even if your DRO ends after the standard 12 months, you’ll need to put up with the DRO being visible on your credit report for another five years, which will continue to affect your credit score and your ability to access credit.
It’s therefore worth considering if you have any long-term plans that could be affected by a DRO on your credit file. For example, if you’re planning to apply for a mortgage, start a business, open a bank account or take out a new phone contract.
What is a Debt Relief Restrictions Order?
If your OR believes that you have acted in a way that goes against the rules of your DRO, they might apply to the court to serve you with a Debt Relief Restrictions Order (DRRO).
Debt Relief Restrictions Orders (DRROs) are essentially a type of court order that extends the restrictions placed on you during your DRO for an additional two to 15 years. They can be used for a variety of reasons, for example, if you:
- Purposely made your financial situation worse before applying
- Provided false information in your application
- Took on debts when you knew you couldn’t repay them
- Paid off some creditors in preference to others
- Committed fraud
- Refused to cooperate with your OR
- Kept certain assets a secret from your OR
- Continued running a business when you knew you couldn’t repay your debts
Receiving a DRRO is not something that should be taken lightly. Failure to follow the restrictions placed on you after being served with a DRRO is considered an offence for which you could be fined or, in serious circumstances, sent to prison.
However, before you’re given a DRRO, you should be given sufficient warning and offered a face-to-face or virtual interview so you can explain your side of the story.
Once the interview has concluded, you’ll be informed of the outcome and told that either no further action will be taken or you’ve been served with a DRRO.
Is a Debt Relief Order right for me?
Before applying for a DRO, it’s important to do your research to consider whether it’s the right option for you or if another solution would be better suited to your circumstances.
Generally, a DRO will be right for you if you don’t own your home, your total debts come in at £50,000 or less, your total assets are worth £2,000 or less, and your disposable income is less than £75 a month.
It’s also important to consider how a DRO could impact other areas of your life, such as your home, your job, your credit score, and your long-term goals. For example, if you own your home and work in the legal sector, you won’t be able to apply for a DRO.
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 alternatives to a Debt Relief Order?
Whether a DRO isn’t suitable for you or you just want to explore your options, there are various alternatives. Here are some other debt solutions you might be eligible for:
Debt Management Plan (DMP)
A Debt Management Plan (DMP) is an informal agreement between you and your creditors to repay what you owe through a single monthly payment.
DMPs are managed by a DMP provider who will communicate with your creditors and split your monthly payment among them, ensuring they receive a fixed percentage each month.
Because it’s not legally binding, you’re not tied in for a minimum period like you are with some other solutions and you can cancel it any time if you believe it’s no longer working for you.
Sequestration
In Scotland, bankruptcy is known as sequestration. It’s a legal process that lets you write off the debts you can’t afford to pay if you have been declared insolvent (can’t afford to pay your bills as they fall due).
Sequestrations are managed by a trustee who will take control of your assets and sell them to ensure your creditors are paid what they’re owed. It costs £150 to apply, but this can be waived if you’re on a low income or receive certain benefits.
Because of the impact it can have on your finances, sequestration is only recommended as a last resort and if all other solutions have been considered.
Minimal Asset Process (MAP)
The Minimal Asset Process (MAP) is a legal process that can give you a fresh financial start. It’s often considered a shorter and cheaper alternative to sequestration as it lasts six months instead of 12 and is free to apply for.
Essentially, you will be considered for MAP instead of sequestration if you don’t own your home and your income is made up of benefits only or is too small for you to pay anything towards your debt after your essential living costs have been paid.
Other popular debt solutions, such as an Individual Voluntary Arrangement (IVA), might be able to help you, but they’re only available in England and Wales.
Conclusion
Debt Relief Orders (DROs) are a type of debt solution that can help you deal with your unaffordable debts by giving you a period of relief from the people you owe. Once 12 months have passed, all the debts included in the DRO will be wiped clean and you’ll be free to make a fresh financial start.
DROs can allow you to deal with your debts in as little as just 12 months, but the impact on your credit file is comparable to other debt solutions. This can lead to a lower credit score and make it difficult to get approved for credit for six years.
If you don’t owe your home, have debts of less than £50,000, have less than £75 left at the end of each month, and your total assets come in at less than £2,000, a DRO might be right for you.
