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Does a Debt Relief Order Affect My Credit Rating?
The Debt Relief Order (DRO) is a debt solution which allows your debts to be frozen for 12 months, before being written off in their entirety. The scheme is only available in England, Wales and Northern Ireland, and a comparable Scottish equivalent is the Minimal Assets Process (MAP). The MAP is a shorter scheme, as your debts are frozen for 6 months, but has a lower maximum total debt limit.
This might seem too good to be true and, to some extent, it is. This is because the DRO has particularly strict eligibility as it is only intended to help those with few assets and a small surplus income who might otherwise be facing bankruptcy. The DRO also imposes notable restrictions on you to ensure you cannot get into further unmanageable debt.
A DRO and Your Credit Report
One of the greatest concerns shared by all the millions of people who struggle with the debts is how it will affect your credit score. This is because your credit score is vitally important for taking out further credit and keeping your interest rates down. Generally, it is not advisable to take out further credit if you already cannot afford to pay back the debts you have. But if you are thinking about the future, you might be considering taking out a mortgage, or you might be required to take out a hire purchase loan for a car or essential white good. In short, it is always good to keep an eye on your credit score.
Your credit score is produced using your credit file or report. This is a document which is compiled by credit report agencies and it has many of your personal financial details. It may have:
- Your name
- Your address
- Previous addresses
- Your debts and their details and status
- Your voting registration
- Public Records
This last detail is how your DRO can impact your credit score as your DRO is available in public records. It is placed on the bankruptcy and insolvency register, which the public and credit agencies can freely search.
Impact on Your Credit Rating
Credit Agencies search the insolvency register in order to put all formal insolvency procedures on their relevant credit reports. This is because your credit report and rating are intended to judge your creditworthiness, or how likely you are to repay your debts, and entering into a insolvency solution is seen as a sign that you have had serious debt problems.
There is some truth in this. After all, if you are considering an insolvency solution, such as a DRO, you are likely to be in some financial difficulty. However, it is also important to note that your credit score is similarly impacted every time you miss a payment, default on a loan or otherwise fail to pay off any loans or credit. This means that you are already likely to have a poor credit score, making entering into an insolvency solution beneficial in the long-term.
When comparing the different formal insolvency solutions, it is important to understand that, regardless of the length of the scheme, it is entered onto your credit report for a minimum of 6 years. Although a successful DRO itself lasts for 12 months, it remains on your credit score for 6 years. Similarly, a Trust Deed may last only 4 years, but is also present on your credit report for 6 years. Essentially, when you enter into any legal debt solution, be prepared for it to impact your ability to take out credit for a minimum of 6 years. However, this does not mean that you cannot start rebuilding your credit in small ways before this date.
Other Important Restrictions
There is a crucial specific impact that the DRO has on your ability to take out credit. These restrictions should only last 12 months, but they are made to discourage you from seeking further credit during that time. These restrictions include:
- You may not take out any further loans or credit of £500 or more without disclosing that you have a DRO
- You may not work as a company director without express permission from the court.
- Everyone you do business with must be made aware of your DRO, and you must use the same name that you used to apply for your DRO while working
- You must seek court permission to form, manage or promote a limited company
If you think it is very likely that you will need to take out another loan to make ends meet during the 12 months of your DRO, keeping in mind that you will no longer have to be making payments to your unsecured debts, it is likely that your surplus income is not sufficient for your expenses and you must seek urgent financial advice. It is possible that your only option is bankruptcy, and you will seriously need to consider re-budgeting your income and expenditure.
There can be serious consequences for breaking these restrictions, as well as for lying on your application. You may be subject to a court-ordered Debt Relief Restriction Order. This ties you to the restrictions associated with a DRO for 15 years, which can dramatically affect your ability to take out further credit.