A guide to debt relief orders

What is a debt relief order?

In the UK, a debt relief order (DRO) is a method of dealing with your debts if you can’t afford to pay them off. If you’re successful in applying for a debt relief order, you’ll be given a set period of time, usually, 12 months, during which you don’t have to pay towards any of your debts (although you do still have to pay rent, bills, and any other regular financial commitments). At the end of this, the debts in the DRO will be written off. 

Who can get a debt relief order?

In order to be eligible, you must:

• Owe £30,000 or less
• Have less than £75 to spend each month after paying taxes and for normal household costs
• Not have assets worth more than £2,000 in total*
• Not own your own home
• Have lived or worked in England or Wales in the last three years
• Not have had a debt relief order in the last six years (even if that one was cancelled after approval)
• Not be going through a different formal insolvency procedure (bankruptcy or an individual voluntary arrangement, for example)
• Have lived, had a property, or worked in England or Wales in the last three years

(Source: Gov.uk)

*A vehicle worth less than £2,000, or a vehicle worth more than £2,000 that’s been adapted because you have a disability, doesn’t have to be included in a list of assets. You can only exclude one vehicle from the list. It can’t be excluded if you only use it for work.

You are not eligible for a debt relief order if you are currently involved in:

• Bankruptcy proceedings
• County Court administration orders
• An individual voluntary arrangement
• Any other type of formal insolvency procedure

What debts can be included in a DRO?

The following debts can be included in a debt relief order:

• Arrears on rent, bills (such as utilities and the phone), council tax, income tax
• Benefits overpayments
• Business debts
• Buy now, pay later agreements
• Credit cards
• Hire purchase or conditional sale agreements
• Loans
• Overdrafts

Are any debts excluded from a debt relief order?

Yes. The following types of debt are not covered by a debt relief order and do not count towards the £30,000 limit:

• Budgeting and crisis loans from the Social Fund
• Child support and maintenance
• Compensation for death and injury
• Confiscation orders relating to criminal activity
• Court-ordered damages or fines
• Debts incurred after the DRO is granted – you could go bankrupt, or be prosecuted if you don’t tell the creditor about the DRO
• Debts against an asset you own
• Fines for drug offences
• Social fund loans
• Student loans
• Unpaid TV licence fees

Is a debt relief order the same as an IVA?

No. An IVA – individual voluntary arrangement – is a legally binding agreement between you and your creditors to pay back your debts over a set period of time. This agreement is set up by a lawyer or an accountant, which you must pay for. They work with you to create the repayment plan, and are responsible for communicating with your creditors throughout the agreement.

How to apply for a debt relief order

Only an authorised debt advisor can apply for a debt relief order on your behalf. In this process, they are referred to as an approved intermediary. Your advisor will guide you through the application process and ensure you include all the necessary information. You can find a qualified DRO advisor by contacting your local Citizens Advice, or through the government’s list of approved organisations.

In your application, you must disclose if you have paid some creditors but not others, given away any of your assets, or sold any of your assets for less than they were worth.

An officer of the bankruptcy court (referred to in this process as an official receiver) will decide if your debt relief order will be granted. They might ask you for more details about your financial situation before they make their decision.

Can a debt relief order be refused?

Yes. An official receiver may refuse a debt relief order because of the following reasons:

• You’ve given away any of your belongings.
• You’ve sold any of your belongings for less than what they’re worth.
• You’ve made one debt a priority – for example, you’ve paid some creditors but not others.

You must disclose this information on your application.

How much does a debt relief order cost?

It costs £90 to apply for a debt relief order and it must be paid in cash. This fee is for the official receiver and is non-refundable, even if your application is not accepted.

Some charities offer grants for debt relief order applications. These normally have eligibility criteria. For example, you may have to prove you’ve sought advice from a recognised debt advice agency, such as Citizens Advice or StepChange, or that you’ve  considered all the available options for help with debt.

What happens after you’ve got a debt relief order?

The official receiver will tell you and your creditors that the debt relief order has been made. They will also explain the rules you and your creditors must abide by. Your creditors cannot ask you for payments while the debt relief order is in place.

Your debt relief order will be added to the Individual Insolvency Register. This register lists people in England and Wales who have an insolvency case and anyone can search it. Your DRO will be removed three months after it ends.

Rules you must follow when you have a debt relief order

• You must not make payments to any of the creditors listed in your debt relief order.
• You must tell the official receiver if your regular income increases, or you get any additional money or assets.
• You must tell your bank or building society about your debt relief order if you apply for an overdraft.
• You must tell a bank or building society about your debt relief order if you apply for a new account and they require you to disclose the information. They may refuse your application, or add extra restrictions to your new account.
• You cannot write cheques if they are likely to bounce.
• You cannot borrow more than £500 without telling the lender about your debt relief order.
• You cannot act as director of a company.
• You cannot create, manage or promote a company (unless you have permission from the court).
• If you manage a business with a different name, you must tell anyone you do business with about your debt relief order.

These restrictions can be extended by anything from two to 15 years if:

1. The official receiver finds out you’ve lied about something related to your debt relief order
2. You are to blame for your financial situation

The official receiver must apply to the court for this to happen. You can also volunteer to continue the restrictions yourself. If the official receiver applies, the extension is referred to as a Debt Relief Restrictions Order; if you volunteer, it is referred to as a Debt Relief Restrictions Undertaking.

You can be prosecuted if you break the restrictions.

How long does a debt relief order last?

A debt relief order normally lasts for 12 months. Afterwards, it will stay on your credit file for six years.

You cannot apply for another DRO for six years from the date yours was approved.

What happens when a debt relief order ends?

The debts listed in your DRO will be written off. You won’t receive notice that the DRO has ended. However, you will find your entry in the Insolvency Service’s register for up to three months after the end date, and can print off a copy of the entry if you need proof the debt relief order has ended.

Creditors should not try to collect any debts which were listed in your DRO and have since been written off. If they do, you can challenge them by sending a copy of your entry on the Insolvency Service’s register, or asking them to contact the service, which will confirm your debt relief order has ended.

Pros and cons of debt relief orders

Pros

• A debt relief order can help you to get out of debt. While not all debts are covered by a DRO, you will have a period of time where debts such as rent arrears, credit cards, loans and overdrafts do not have to be paid off.
• Debts covered by the DRO will be written off once the agreed period of time is over.

Cons

• A debt relief order will stay on your credit record for six years. This affects your credit score and can make it more difficult for you to get a credit card, or be accepted for a mortgage.
• A DRO may affect your tenancy agreement.
• Your bank may freeze your account. However, you should be able to open a basic cash card account while your DRO is in place. This is where any wages or other payments can be paid.
• You may have to return any goods bought on hire purchase, if any of your debts are for them.
• Having a DRO can affect applications for British citizenship. According to the government’s immigration policy: “The decision maker will not normally refuse an application simply because the person is in debt, especially if loan repayments have been made as agreed or if acceptable efforts are being made to pay off accumulated debts. However, where a person deliberately and recklessly builds up debts and there is no evidence of a serious intention to pay them off, the decision maker will normally refuse the application.”

Alternatives to debt relief orders

A debt relief order may not be the right solution for you. There are other options to consider before you decide how to proceed.

Administration order

An administration order (AO) is a court-approved agreement between you and your creditors, in which you agree to pay back your debts over a set period of time. You are eligible for an administration order if you have:

• Debts that total less £5,000 or less
• An unpaid county court judgment (CCJ) or high court judgment
• Two or more debts

No debts are excluded from an AO, but a creditor can object to being included and a judge will decide whether it is included or not.

Bankruptcy

Bankruptcy is a way to clear your debts if you can’t pay them back within a reasonable period of time. However, it can have serious consequences and a decision should not be made lightly.

If you declare bankruptcy, assets you own will be sold off to pay your debts and your unsecured debts will be written off. A period of bankruptcy normally lasts for a year, during which you have to follow restrictions.

The rules on bankruptcy are different in Scotland, where it is known as sequestration.

Debt management plans

A debt management plan (DMP) is an informal (i.e. not legally binding) agreement between you and your creditors. It sets out how you pay back your non-priority debts, which is consolidated into one monthly payment.

A DMP is best if you are able to pay your priority debts, but need help paying back non-priority debts, as priority debts cannot be included in the plan.

Individual voluntary arrangement

An individual voluntary arrangement (IVA) is a legally binding agreement between you and your creditors, set up by a lawyer or accountant. You must agree to pay back your debts over a set period of time.

You have to pay to set up an IVA, but it may be a better alternative to bankruptcy if you own a home or business, or would lose your job if you went bankrupt.

FAQs

How long does it take to get a debt relief order?

Once your debt relief order application has been submitted, it can take between 10 and 14 days before you find out the decision.

Can I get a debt relief order if I work?

Yes, if you are unable to pay your debts and meet the following criteria:

• You owe £30,000 or less
• You have less than £75 to spend each month after paying taxes and for normal household costs
• You do not have assets worth more than £2,000 in total*
• You do not own your own home
• You have lived or worked in England or Wales in the last three years
• You do not have had a debt relief order in the last six years (even if that one was cancelled after approval)
• You are not be going through a different formal insolvency procedure (bankruptcy or an individual voluntary arrangement, for example)
• You have lived, had a property, or worked in England or Wales in the last three years

Can I get a mortgage if I have or had a debt relief order?

Yes, although it will take some time to rebuild your credit score. The debts in a DRO will have been cleared once it ends, but the DRO will stay on your credit file for six years.

You are only eligible for a debt relief order if you don’t own your home. So it is likely that someone with a previous DRO who is looking to get a mortgage has improved their personal finances. 
Do you need advice on debt relief orders? Contact Manak Solicitors today.