If you’re in debt and struggling to make your way out of it, a debt relief order could help. The order provides relief for people with limited assets, and if you’re eligible, you could potentially write off your debt.
When you apply for a debt relief order (DRO), it can only be granted by the official receiver. If they approve the order you’ll enter into a 12 month period where all of your debts and interest rates are frozen.
During the 12 months, you won’t have any problems with your creditors or debt collectors. Once the term finishes, you could potentially write off your debts if you can prove your financial affairs haven’t improved.
However, some rules surround debt relief orders, and not everyone is eligible. If you owe money and cannot pay it back, the DRO might be better than bankruptcy.
Are you eligible to apply for a debt relief order?
Debt relief orders are beneficial, but you must meet the eligibility criteria. If you:
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Have little disposable income after paying your essential costs
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Owe a maximum amount of £30,000
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Have few assets, such as cars and properties
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Rent your property
While these are the basic rules, the official receiver will need to see proof that you’re eligible for the DRO. Most will approve the order if you meet the following criteria:
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You cannot pay your debts
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Your disposable income each month is £75 or under
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Your savings or other assets are worth £2000 or less
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You haven’t used a DRO in the last six years
Are there any loopholes?
The rules, in general, are pretty strict, but your application will depend on your circumstances. In some cases, the official receiver will be more lenient, even if you have some assets worth more than £2000.
For example, if you need specific equipment for work you won’t have to surrender it, and individuals with disabilities can also keep their car.
Your debt relief order advisor should also know if you’ve sold assets for less than they’re worth. For example, if you sold some of your work equipment for £1000, but it’s actually worth £2000.
It’s also advisable to share information about where your money goes, including whether you paid back the money you borrowed from family members before your creditors.
Are debt relief orders suitable for you?
Before applying for a DRO, it’s essential to know which debts are covered. Also known as ‘qualifying debts’, a successful debt relief order application means your creditors won’t bother you.
Qualifying debts include:
- Benefit overpayments
- Legal, medical and veterinary bills
- Council tax, income tax and rent arrears
- Phone, internet and utility bills
- Business debts
- Loans, overdrafts and credit card debts
- Outstanding buy now pay later agreements, including catalogue items
- Money owed to family and friends
While most debts are included in a DRO, there are some exclusions. If you have any of the following debts, you might want to consider an alternative solution:
- Outstanding student loans
- Owed child maintenance support
- Magistrates court fines
- Loans from the social fund
- Compensation for injury or death
Your obligations during the DRO
As with any debt relief solution, there are a set of rules that you need to follow. A failure to comply with these regulations will terminate the order, and you’ll have to deal with your creditors again.
You might find certain restrictions surprising when you enter into the agreement, but a debt adviser can prepare you. Here are just some of the ways your debt relief order might impact your daily life.
Issues with your account and rental agreement
In some cases, your bank might close your current account, and your standing tenancy agreement could cause some issues. However, a debt advice service can explain whether you need to worry about these potential implications.
Changes to your legal and residential status
When you use a DRO, it might cause problems with your application for British citizenship. Of course, this won’t be an issue if you’re already a citizen. Another thing to be wary of is whether you hold power of attorney over anyone.
If you’re responsible for another person’s finances, your power of attorney will end.
The debt relief restrictions
Many people jump straight into a debt relief order because they want to halt further payments on all outstanding debts. However, these orders have lots of restrictions, and you’ll only be able to potentially write off the debts included if you stay in line with the rules.
You can’t set up a business unless you have permission
If you want to engage in any business activity, including setting up, promoting, managing or acting as a director, you need to get permission first. This includes having a business under another name from the one you used when applying for the DRO.
You can only get permission by going through the court, and you might not be successful.
Limitations on borrowing money
When you have a debt problem, getting credit is difficult anyway, but it’s near impossible with a debt relief order. If you want to borrow £500 or over, you’ll have to ask your creditor before taking out a loan – even from a friend or family member.
Implications on your credit rating
Taking out a DRO means your name will appear on the individual insolvency register and your credit record. This means that credit reference agencies will have your information, making it harder for you to secure loans, financing or credit cards.
However, when the DRO finishes and three months pass, your name will be clear, and you can begin to rebuild your credit file.
Is there a difference between a debt relief order and an individual voluntary arrangement?
When it comes to avoiding bankruptcy court, there are two main avenues to explore; a DRO or individual voluntary arrangements. As debt relief orders state that a person must have no more than £2000 in assets and under £30,000 of debt, an IVA might be a better option.
The individual voluntary arrangement is a legally binding agreement between you and your creditors. It’s your show of commitment to pay off your debts gradually, and the creditors will freeze any interest rates during the repayment period.
You’re eligible for an IVA if:
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You have debts that are over £6000. These debts must be unsecured, and you should owe them to at least two creditors.
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After paying for your household bills and essential expenses, you have enough disposable income to pay a small amount to all the creditors.
While a DRO can potentially write off your debt, an IVA means you pay it back each month. The benefit of individual voluntary arrangements is that you can repay your outstanding debts instead of writing them off.
Everyone runs into money problems, but making an effort to pay what you can and avoid a bankruptcy order will benefit your credit rating and employment opportunities in the future.
Which debt solution is right for you?
There are many things to consider before making a final decision, but some people might find they’re only eligible for an IVA. It entirely depends on your circumstances, but if you have spare income after paying your normal household expenses at the end of each month, it’s worth considering.
Also, with an IVA, you can pay off a lump sum and recover your credit record quicker. If you’d like some support and discuss your eligibility for both debt-relief options, you can speak to an authorised debt adviser.
We offer confidential debt advice so you can get back on your feet and move on with your life. If you’d like to speak to our friendly team, please don’t hesitate to contact us.
Our specialists can help you if you’re on a low income and can’t pay your debts or if you’re struggling to keep up with crippling interest rates. Debt doesn’t have to be a problem that defines the rest of your life, and with us on your side, it won’t be.