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What is a Debt Relief Order?
If you are struggling with your debt, there are many insolvency solutions you can consider. In England, Wales and Northern Ireland, the main formal insolvency solutions you can consider are an Individual Voluntary Arrangement (IVA), Bankruptcy, and Debt Relief Orders (DROs). These are comparable to the Scottish schemes a Protected Trust Deed, the Debt Arrangement Scheme (DAS), Sequestration, and the Minimal Assets Process (MAP). You can also consider various informal solutions, such as a Debt Management Plan.
Here we are going to help you understand the DRO as a solution for your debt problems. We explore who it can help, what it does and compare it to other debt solutions.
Who is the DRO for?
The DRO is designed for those who are struggling with debts but do not have any assets and have very little disposable income to repay those debts. It can be a great alternative to avoid bankruptcy and may result in your debts being written off. However, it has strict eligibility criteria. You must:
- Be resident in England, Wales or Northern Ireland
- Have a disposable income of less than £50 per month and be unable to meet your minimal payments
- Not own your home or have a mortgage
- Not own a car worth more than £1,000
- Not own any other assets worth more than £1,000
- Have less than £20,000 total debt if you live England or Wales
- Have less than £15,000 total debt if you live in Northern Ireland
- Have no other current insolvency solution, such as a IVA
The DRO Process
The stringent criteria is used to determine that you are not able to repay your debts and might otherwise be facing bankruptcy. If you meet the criteria, you then work with an advisor and an official receiver, and pay a fee to set up the DRO. This fee is £90 to be paid to the Insolvency Service. Although it is possible to make several payments, you must have completed the entire payment before the DRO begins.
Once it begins, the DRO is designed to give you some breathing room as your repayments are frozen for 12 months. This means you will not have to pay the debts included in your DRO for an entire year. Many unsecured debts can be included, such as:
- Personal Loans
- Credit Cards
- Rent Arrears
- Overdue Utility Bills
- Council Tax
- Telephone and Broadband Deals
A key aspect of the DRO that you must understand the restrictions it places on you and your finances.
- You must continue to pay the debts that are not listed in the DRO and your other normal household expenses.
- You cannot take out credit of £500 or more without telling the lender you have a DRO
- You cannot act as a company director without court permission
- You cannot promote, manage or set up a limited company without court permission
- You cannot work in business under a different name from the one you used to apply for the DRO as you must disclose your DRO to everyone you do business with
After these 12 months have ended, if your circumstances have not changed and you are still unable to pay, these debts are written off. You would have no more payments to make and could become debt free. This is why there is a limit on the amount of debts that you can have with a DRO.
If your situation does improve within the 12 months, and it is found that you can now afford to make repayments, your DRO would be revoked. This might mean that you need to enter into another debt solution, such as an IVA, as, although you may now have a surplus income larger than £50, it might not be enough to meet your minimum payments. Don’t worry if this is the case, there are plenty of potential ways you may be able to reduce your monthly repayments.
Your DRO can also be revoked if the authorities discover that you have lied in your application. Lying may mean that you have given away assets before applying, or sold them at less than their value, so that you meet the necessary criteria. It may also mean you:
- withheld the truth about an improvement in your circumstances
- refused to cooperate with your official receiver
- broke any of the restrictions placed on you
- showed preferential treatment to certain creditors, such as your friends, or
- took on debts before your DRO that you knew you would never be able to repay.
If your official receiver thinks you are guilty of this, you may be given a Debt Relief Restriction Order (DRRO)
The Debt Relief Restriction Order
If you are found to have acted dishonestly with your DRO, you may be given a DRRO. This is not a voluntary debt solution, but a court-ordered solution which extends the restrictions placed on you for 15 years, rather than just 12 months. If you do not comply with these restrictions, you can be fined or sent to prison. Any DRRO you may have continues, regardless of the status of your DRO.
If your official receiver is considering a DRRO against you, they will contact you and allow you to explain your perspective in an interview. If your official receiver is unconvinced by your defence, they will inform you that they will apply for a DRRO. Once you have been sent notice of the DRRO, you have 21 days to respond. You can accept the official receiver’s reasoning, or dispute them in a court hearing.