Debt Relief Orders (DROs) are a simple and cheap alternative to bankruptcy if you have few assets and little money spare each month to repay your debts. There is a full description in this Guide to Debt Relief Orders . If you have a Debt Relief Order (DRO) it lasts for 12 months and during this time you must inform the Official Receiver (OR):
- if you receive any money or other assets, or
- if your income increases.
If this happens, the OR may decide to ‘revoke’ your DRO – this means the DRO is effectively cancelled and your creditors will once again expect you to pay your debts. This won’t always happen – the OR has discretion about whether to revoke a DRO and in practice revocations are rare.
The DRO limits
DROs have several ‘limits’ and two of these matter when looking at possible revocations: you cannot get a DRO if you have more than £50 ‘spare’ income each month that you could pay towards your debts; and you cannot get a DRO unless the total value of your assets is less than £1,000.
When you have started a DRO, if you get some extra money or your income increases this may take you over these limits. In these cases the Official Receiver will decide if your DRO should continue or if it will be revoked. The Insolvency Service says:
the decision to revoke following a change of circumstances is no longer being so strictly applied, with revocation now only occurring if the creditors could be expected to benefit if the DRO was revoked.
My income has increased
You need to inform the OR at the DRO Unit of any increases in your income, but it is unlikely that small increases will result in revocation. Not only do you have to pay tax on the increase, but benefits such as Child Tax Credit or Housing Benefit may be reduced because you are earning more. A new Income and Expenditure survey may be done, so any increased costs will be taken into account. For example, if you are getting more benefits because a new baby has arrived, then your costs will also have gone up.
If your income hasn’t permanently changed, for example you did some overtime in December that isn’t usually available, then the OR is more likely to treat the extra money as a one-off payment than as additional income.
If you aren’t sure whether you should contact the DRO unit or what you should say, talk to the adviser that set up your DRO as soon as possible.
I have received some money
You must inform the OR about any money or property you receive. This includes:
- money or property you inherit
- money received from PPI or similar reclaims such as payday loan refunds
- lottery or other gambling winnings
- a lump sum from benefits back-dating
- a tax refund
- money from the settlement of a court case.
You should do this promptly, even if you think the money is going to be covered by one of the situations mentioned below. It’s important that you don’t spend the money because if the DRO is revoked, you may want to use some or all of the money to settle your debts.
A lump sum from benefits back-dating may sound large but is often not a problem because it treated as “income” over the period the back-dating relates to not “capital”. So the question is would you have exceeded the “spare income of £50” limit. If the benefit is a claim for disability (PIP, DLA, AA) then an extra cost line for the disability would also be included in this re-calculation.
A settlement for a Personal Injury may not matter. The guidance says:
Personal injury payments received during the moratorium period will be dealt with depending on the composition of the payments (special and general damages). If the compensation relates solely to general damages and is received during the moratorium period, this will not adversely affect the DRO so long as the funds are used only for living expenses and not converted into tangible assets.
Your solicitor will be able to explain whether you are getting general or special damages (or a mixture). Broadly general damages are compensation for pain and injury and these will be ignored by the OR but you shouldn’t use the money to buy an asset until your DRO has ended.
If you have received money for a special purpose, the OR will take this into account. For example you may have been given a bonus by your employer that was on condition that you spend the money on training.
The amount you receive is important
If the value of your windfall is less than £700, the OR has stated that she will automatically exercise her discretion and not revoke your DRO provided you have been open about it i.e. you have informed the OR as you are legally obliged to.
If the lump sum is between £1,000 and £1,850, the OR will look at the case taking into consideration numerous factors, including the size of your debts, health, personal circumstances, age, etc. A decision will be made on an individual basis as to whether it would be appropriate to revoke or not. To construct a couple of cases (NB these are my examples not guidance by the OR), if you inherit £1,500, then the OR is more likely to revoke your DRO if you are aged 30, in work, with debts of £5,000 than if you are 70, living on a state pension with debts of £13,000.
For lump sums over £1,850, it is more likely that a DRO may be revoked, although any mitigating factors would be included in the OR’s consideration.
(These figures come from an Insolvency Service document.)
How often do revocations happen?
In 2013/14 there were 26,786 DROs. Of these, 282 cases were reviewed because of windfalls or income increases. This resulted in:
- 154 revocations on the grounds that the asset limit was exceeded after a windfall had been received; and
- 29 revocations on the ground that the disposable income had been exceeded after an income increase.
It is also possibly, but extremely rare, for a DRO to be revoked after it has completed. These are called Post Moratorium Revocations and the OR has to go to court to get one. In 2015/16 there were five cases.
My DRO is being revoked – what should I do?
If your DRO is being revoked, you need to find an alternative debt solution. Obviously if you have inherited a lot, you can pay all your debts off! The other main possibilities are: using a windfall to make full and final settlements on your debts, a Debt Management Plan and bankruptcy.
This article I’ve been sent PPI and my DRO has been ended looks at the very rare situation where you get a cheque for PPI for an old complaint that had been rejected.
Implications if you are thinking about getting a DRO
If you expect your finances to recover quickly – perhaps you have been made redundant but expect to be able to get a job soon – then you probably shouldn’t be thinking of a DRO in the first place. Have a look at a token payment DMP instead.
If you think you may get a lump sum in the next twelve months – perhaps you are trying to reclaim PPI, get payday loan refunds , you have a court case under way where you may get a financial settlement, or you have asked for some benefits to be backdated – then it would probably be better to wait and see if this happens before deciding on a DRO. If you get enough money you may not need the DRO at all!
But in all other cases, I wouldn’t let worries about whether your income might increase stop you going for a DRO. As you can see from the statistics above, revocations are pretty rare.