Ms G asked:
I have about £18,000 of debts which I can’t afford to pay after my partner left. I am part-time at work, with very little money and renting, but I have been told I will be made redundant in November. I should get about £2,500 redundancy pay and I will need that while I look for a proper job – I won’t get Universal Credit straight away. So is it best to wait and apply for a Debt Relief Order (DRO) when the money is gone?
Based on what Ms G said, that sounds OK as a rough approach. And with a difficult financial situation at the moment and the worry about her job, it is good to have a mental plan, it helps you feel a bit more in control.
It’s not possible to plan exactly in this sort of situation because the big unknown is how long it will take Ms G to find a new job, and what that will pay. But there are some of the possibilities to consider.
Does Ms G qualify for a DRO now?
It sounds as though Ms G may qualify for a DRO now. DROs are usually a great option if you qualify for one – your debts are written off after a year with no need to make monthly payments at all.
There are a list of criteria you have to meet. These are set out in What is a DRO?
I think it might be useful for Ms G to talk this through with a debt adviser now. There isn’t much point in basing her future plan around a DRO if for some reason she can’t have one!
If she does, why not get one now?
I said DROs are “usually” a great option – the main exception is when you expect your situation to improve a lot soon or to get some money soon. Which is Ms G’s case.
If she gets a DRO now, her redundancy money in a few months would be treated as an “asset” she acquired during her DRO. If her redundancy money will be about £2,500, her DRO would be ended and she would be back with her debts again.
If she was just worried that her job wasn’t very stable, it may still be worth going ahead with a DRO – sometimes that can go on for years… But as she knows she is very likely to lose her job in the next year then a DRO now would not be a good option. So Ms G needs to delay getting a DRO until after her redundancy, as she suggests.
Getting through the next few months
Token payments – a good waiting option
While she is waiting, her best option is probably to make token payments to her debts. Paying £1 a month to a debt is never going to clear it, so this isn’t a good long term choice, but it can keep a creditor happy that she isn’t ignoring the debt.
This only works for non-priority debts such as loans, credit cards and catalogues. You can’t make token payments to priority debts such as rent arrears or council tax arrears.
If Ms G talks to a debt adviser now about a DRO, they will be able to discuss how she can manage any priority debts before her DRO.
Getting some advice about redundancy and benefits
It may also be a good idea for her to check on what benefits she will be able to claim after redundancy. She could use a benefits calculator such as Turn2us or go her local Citizens Advice.
Citizens Advice can also talk to her about what she is entitled to when she loses her job, including any holiday pay. And she should also get advice if she is concerned that she was unfairly chosen for redundancy.
After redudancy
After redundancy Ms G expects to be living off the redundancy money and benefits until she finds another job.
Some points for her to consider then about when to apply for a DRO:
- is the interest frozen on the debts? If it isn’t, then it’s good to opt for a DRO while the debts are under the maximum DRO limit – over that she will have to go bankrupt instead;
- bankruptcy probably won’t be much different than a DRO for Ms G – but the bankruptcy fee at £680 is very high, and from April 2024 no fees are chargesd for a DRO;
- you can have a DRO when you have a few hundred pounds in the bank. Ms G doesn’t have to run out completely before getting a DRO. And it usually takes a couple of months to apply for a DRO, it’s not instant.
And a couple of “nice problems” she may face:
- if she has a chance of getting a well-paid, full-time job she may not qualify for a DRO and bankruptcy would be her best option. For many people with few job options and childcare costs, this is a problem they may feel is very unlikely!
- if she gets another job quickly but it still isn’t well-paid so she will need a DRO, what about the redundancy money? It’s OK to spend the money on any essentials she needs: car repairs, clothes, essentials for the house etc. If Ms G buys anything large, it’s a good idea to keep the receipt so she can show what the money was spent on. It’s not OK to use it to clear some debts but not others, especially if those are debts to friends or family.
Elizabeth Everett says
It can be a big problem for the client if family debts have to go into the DRO and be written off with everything else.
Sara (Debt Camel) says
True – but if the client has less than £50 a month spare income then they can’t repay their debts and there isn’t really anyway around that. The client can always make a gift to relatives later if their finances improve – but at that point there legally isn’t a loan to repay.
Tracy says
Hi I was made redundant and I spent the redundancy on an advance of rent . I am in the middle of a dro application and it is a part time job so I still have less than £50 spare .
I do not start the new position until jan 2021 and won’t have wage slips etc to show the dro .
I am contemplating turning the job down so I can get the dro completed without any problems .
Do I tell step change I have an offer of employment now before they submit my dro or wait until I start the job ? Thanks
Sara (Debt Camel) says
Tell StepChange now. They probably won’t need to see wage slips – a copy of the offer letter may be enough if they can work out what you would get paid for that. Have you looked at how your benefits would change?
Lewis says
I’m getting made redundant due to the pandemic after working for past 4 years. I have a loan, car finance and credit card debt that currently totals 14,000 pounds. My biggest repayment is my loan at 445 pounds per month. I’m 26 and have excellent repayment track-record but worried this is now going to change.
I’ve registered for clearing at University for September as I already completed my first year but that got this job opportunity so I decided not to finish my degree.
What are my best options, I want to pay this debt off but it’s now probably going to take longer than I had wished. However I don’t want to be disadvantaged and discredited by this to future lenders.
Car is with Motonova Finance.
Personal Loan is with Credit Union.
Credit Card debt is with MBNA and Tesco.
Thanks,
Lewis
Sara (Debt Camel) says
Sorry a lot of questions…
You are expecting to be at uni for 2 or 3 years from September this year? Do you actually want to finish a degree or is it just that you have no other appealing option at the moment?
Are you renting? Will you need to move for uni? Are you single? Any kids?
Can you live without the car? Obviously you may prefer to keep the car, but is your life at uni possible without it?
If you didn’t go back to uni, have you a realistic chance of getting a well paid job in the next year, so you can go back to repaying your current debts as normal?
Liam says
Im getting made redundant in april and will get around £3500 redundancy plus £1600 pilon. Im just about to start a tpp. Can i apply for a dro after i recieve my payment, or should i wait a few months? I owe £25500
Sara (Debt Camel) says
Do you have any rent arrears?
How easy will it be to find another job?
Liam says
No rent arrears, but i think it will be harder to find a job. I dont have much extra income, with stepchange it shows £45 after priority bills
Sara (Debt Camel) says
Well I suggest you need to wait and see what happens and when you get a job.
You won’t be able to have a DRO with more then £2000 in the bank. And you may need that money not to repay your debts but to live on until you do get another job.
Starting to pay token payments now is good – you should treat all your non priority creditors equally and avoid taking out any new credit.
If you then get a job when there is more than £2000 left in the bank, talk to StepChange about this and how to proceed.