Debt can feel like a heavy weight, crushing your finances and preventing you from moving forward. When payments become unmanageable, it’s important to act before things spiral out of control.
One potential debt solution to consider is a Debt Relief Order (DRO). DROs are a formal way of legally “freezing” your debts for 12 months, protecting you from creditor harassment and enforcement action during this time.
While a DRO can wipe the slate clean in some cases, it also comes with restrictions and risks to weigh up. This guide will explore everything you need to know about DROs in England and Wales, from eligibility criteria to the application process.
- A DRO is a formal debt solution that freezes repayments on qualifying unsecured debts for 12 months. At the end of this period, provided there is no change in your circumstances, the debts are written off, except for any excluded debts.
- To be eligible, you must owe less than £30,000 in total and have very little disposable income or assets. Your vehicle can be excluded if it's worth under £2,000.
- DROs will usually show on your credit reference file for 6 years, which may limit access to future credit. You also face usage restrictions during the 12-month period.
- You must pay a fee of £90 to apply for a DRO, and it must be submitted through an approved debt adviser, who will check your eligibility.
- If your financial situation improves, the DRO could be revoked. You must inform The Insolvency Service of any changes.
- DROs only impact the applicant's credit, not their partner's. However, joint debts will still need to be repaid by the non-applicant.
- If you're ineligible for a DRO, alternatives like IVAs, DMPs and consolidation loans may be more suitable depending on your circumstances.
What Are Debt Relief Orders?
A Debt Relief Order, or DRO, is an insolvency solution designed to help people with low incomes and few assets deal with unmanageable debt. It works by legally “freezing” repayments on your qualifying debts for 12 months.
During this 12-month period, also known as a moratorium, your creditors listed in the DRO can’t contact you requesting payments or take enforcement action. At the end of the moratorium, the restrictions of the DRO end and you will not have to pay the debts listed in the DRO.
However, a DRO isn’t necessarily a one-size-fits-all solution. It comes with restrictions during the 12 months, remains on your credit file for 6 years from the approval date, and could be revoked if your situation improves.
You also need to meet quite strict eligibility criteria related to your income, assets and total debts. Applications cost £90 (correct as of October 2023) and must be submitted through an approved debt adviser, who will determine if a DRO is suitable for you.
Who Is Eligible for a Debt Relief Order?
To qualify for a DRO in England and Wales, you must meet certain eligibility criteria:
- Income - You can have no more than £75 per month in disposable income after paying essential living costs.
- Assets - The total value of your assets, excluding one vehicle, must be under £2,000.
- Debts - Your total unsecured debts cannot exceed £30,000. Certain debts like student loans don't count.
You must also have lived or worked in England or Wales within the last 3 years, and not be subject to any other insolvency proceedings.
Your debt adviser will thoroughly assess your finances to confirm you satisfy the requirements during the application process.
What Debts Can Be Included in a DRO?
A DRO covers what are known as “qualifying unsecured debts”. These include:
- Credit card and personal loan balances
- Payday loans
- Rent, council tax or utility bill arrears
- Unpaid income tax
- Benefit overpayments
- Personal debts owed to friends/family
- Old, defaulted account debts sent to collections
Importantly, secured debts (debts tied to collateral, such as mortgages and car finance) cannot be included. You’ll also remain liable for certain priority debts during and after the DRO, such as child maintenance, court fines and TV licence arrears.
What Happens During the 12 Month DRO Period?
Once your application is approved, here is what typically happens during the 12-month debt relief order period:
- Creditor repayments freeze - You stop making payments towards debts listed in the DRO. Creditors also cannot contact you requesting payments.
- Ongoing priority debts - You must continue repaying any debts not included in the DRO, such as student loans, tax debts and child support.
- Restrictions apply - You cannot borrow over £500 without disclosing your DRO, act as a company director, or run a business with a different name without revealing to those you do business with your DRO.
- Details published - Your name, address and DRO details will appear on the Individual Insolvency Register.
- Inform of changes - You must notify The Insolvency Service of any increases in income or assets acquired during the DRO period.
- DRO could be revoked - If your situation improves, the DRO may be revoked. You would then need to repay DRO creditors.
If you adhere to all requirements and your circumstances don’t drastically change, your DRO debts will be legally written off after 12 months.
The Pros and Cons of Debt Relief Orders
While debt relief orders offer a legal way to pause repayments on unsecured debts, they aren’t necessarily suitable for everyone. Weigh up the key advantages and disadvantages before deciding if a DRO is right for you.
Benefits of a DRO
- Stops creditor harassment and enforcement action for 12 months.
- Eligible unsecured debts are written off at the end.
- Application fee £90, inexpensive compared to alternatives like bankruptcy.
- You aren't required to make monthly payments.
- Available to those with little disposable income/assets and normally ineligible for other solutions.
Downsides of a DRO
- Remains on your credit file for 6 years, potentially harming access to future credit.
- Borrowing restrictions apply during the 12-month period.
- Could be revoked if your financial situation improves.
- Your details will appear on the Individual Insolvency Register.
- Does not absolve you of priority debts like student loans and child maintenance.
- Joint creditors can still pursue the joint applicant for outstanding DRO balances after completion.
As you can see, DROs offer legal protection from creditors, but also come with downsides. Think carefully about whether the pros outweigh the cons for your personal situation.
How Do Debt Relief Orders Affect Your Credit?
As an insolvency solution, a DRO will be added to your credit files held by the three main credit reference agencies. The DRO entry will remain for 6 years from the date it was approved.
Much like other defaults, CCJs, and missed payments, the DRO notation indicates a history of financial difficulty. This means your credit score will be negatively impacted (how much it drops depends on your current score).
Lenders may also see you as a higher risk and decline future credit applications for loans, mortgages, and credit cards. If you are approved, you may only qualify for higher interest rates.
Will a Debt Relief Order Affect My Partner?
While a DRO can negatively impact your own credit rating and borrowing ability, it does not directly affect your partner’s credit file. Their credit score will remain unchanged.
However, if you have any joint unsecured debts that you share responsibility for repaying – such as joint personal loans or rent arrears in both of your names – these can be included within your DRO debts.
This means you will be protected from repayment demands and enforcement for these joint debts during the 12-month moratorium. But after the DRO concludes, your partner will remain fully liable for repaying any outstanding balances on former joint DRO debts. Creditors can still pursue them for these amounts.
Before applying for a DRO, it’s important to consider how it may financially impact your partner both during and after the process if you share debts. An alternative solution, such as debt consolidation, may be better for joint borrowers.
How to Tell If a Debt Relief Order Is Right for You
With the advantages and disadvantages in mind, how do you know if pursuing a DRO makes sense for your circumstances? You may wish to ask yourself the following key questions:
- Are you eligible? Do you meet all the DRO criteria related to income, assets and personal circumstances? If not, you may need to consider alternative debt solutions.
- Can all your debts be included? For those with priority debts that aren’t suitable for a DRO, an alternative like a consolidation loan may be more suitable.
- Will the impact to your credit file matter? DROs can make accessing credit much harder for the 6 years it will remain on your credit file. If you need to obtain credit soon, this could be problematic.
- Can you stick to usage restrictions? The DRO borrowing and business activity limitations may be restrictive for some. Make sure you can adhere to all requirements.
If you’ve determined a DRO aligns with your overall situation, the next step is to connect with an approved debt adviser to initiate the application process.
How to Apply for a Debt Relief Order
DRO applications can only be submitted through an approved debt adviser, who will determine if you are eligible and help complete the process. Here are the key steps:
01. Seek out a DRO adviser
The adviser will be able to check if you meet the DRO criteria and clearly explain the pros and cons before moving forward. Citizens Advice offer DRO assistance, or you can use an advisor listed on the Insolvency Service website.
02. Provide details of your finances
You will need to provide accurate details on your income, outgoings, assets and debts so eligibility can be assessed. Failure to disclose information may lead to the DRO being rejected.
03. Pay the DRO application fee
This fee of £90 must be paid before submission. Payment can be made in instalments if needed. Some debt charities may be able to cover the cost.
04. Complete application forms
Work with your adviser to complete all required DRO application forms accurately. This is submitted to the Insolvency Service for approval.
05. Receive notice of the decision
If approved, the Insolvency Service will send you a notice outlining next steps. If your application is rejected, the application fee will not be refunded. In this case, you would need to discuss alternative solutions with a professional debt adviser.
Alternatives to Debt Relief Orders
If your application was unsuccessful, or you have decided that a DRO would not suit your financial or personal circumstances, there are various alternatives that you may wish to consider. Some examples include:
- Individual Voluntary Arrangement (IVA) - An IVA involves making monthly contributions from income for 5-6 years, after which, provided all terms have been adhered to, any remaining unsecured debts included in the IVA are written off. This may be an option if you have regular income.
- Debt Management Plan (DMP) - A DMP allows you to consolidate multiple debts into one lower monthly payment. However, unlike a DRO, creditors can choose whether to agree to the DMP terms – it is not legally binding.
- Consolidation Loan - This allows you to roll multiple unsecured debts into one new loan with fixed monthly repayments. This simplifies the process of juggling multiple payments.
Each option has different eligibility criteria, pros, and cons. But exploring alternatives means you still have avenues for dealing with unaffordable debts if a DRO is not suitable.
Could a Consolidation Loan Be a Viable Debt Solution?
Consolidation involves taking out a new loan and using the funds to pay off multiple debts, like credit cards, store cards, payday loans and overdrafts. You’ll then be left with one fixed monthly repayment, potentially at a lower interest rate than some or all your existing debts.
A consolidation loan may allow you to pay off your debts faster compared to minimum payments or extend the repayment period to lower the monthly payments (though this may mean you pay more in interest overall). Unlike DROs, they’re accessible to those with assets and a higher income.
Consolidation loans do come with credit and affordability checks, so approval and interest rates may vary. Speak to an adviser to check if consolidation may suit you.
Get Debt Help Today
If you’re overwhelmed by debt and unsure which solution is most appropriate for your situation, professional debt advice can help provide clarity on the best path forward.
Here at Consolidation Expert, we’re ready to support you. We specialise in matching those struggling with debt with suitable consolidation loans tailored to their unique circumstances. Our lenders offer loans of up to £75,000 and consider applicants with a wide range of credit scores.
To learn more and check your consolidation loan eligibility today, apply online now.
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