A Debt Relief Order (DRO) has been described as “bankruptcy lite” because it gets rid of your debts, costs a lot less in fees (only £90) and is much simpler than bankruptcy.
It has very strict rules. Unlike most of the other debt solutions, you have to be able to meet all of the criteria, there isn’t any “wriggle room”. The most important ones are:
- £20,000. You can’t decide to leave out a debt to get under this limit – this is discussed in this article;
- you can’t own a house;
- your assets must have a second-hand value of less than £1,000. That sounds like hardly anything, but ordinary household objects and clothes etc are not counted at all and there is an additional allowance for a car, see below;
- you can’t own a car or motor bike worth more than £1,000 (using Parkers value figures);
- you must have less than £50 a month spare income after paying all your normal bills and expenses;
- you can’t have had a DRO within the last 6 years;
- you can’t be a company director;
- you can’t be an undischarged bankrupt or in currently an IVA;
- if you are over 55, you can’t have a large undrawn pension that you could access. (See Pensions and DROs for more details. The person that sets up your DRO will be able to find out whether this will be a problem for you.)
The £50 “spare income” test
Most of these criteria are straightforward but you may be unsure about the £50 “spare income” level. The level of spare income will be assessed by the debt advisor that sets up your DRO (see below).
The expenses allowed are not the same as those usually used in an IVA or a DMP – I have come across people who have had an IVA payment of over £100 proposed who have been “under £50” on the DRO criteria. Some people who have been struggling with debt repayments find the expenditure allowances surprisingly generous – this may be the first time for many years that you have any money to spend on clothes!
If all your income comes from benefits or state pension then you will pass this test, so you don’t need to worry that disability benefits such as DLA or PIP will mean that you have too large an income.
You don’t have to make any monthly payments with a DRO
A DRO is designed for people with little or no spare income, therefore you don’t have to make any monthly payments. This is a major advantage over an IVA, where you have to make payments for five years usually and over a DMP, which could last a very long time if you can only make low payments.
Your debts are wiped out after a year
A DRO doesn’t wipe out all kinds of debt. Two common types that are excluded are student debts and magistrate’s court fines, including TV license fines. Fixed penalty fines such as parking fines and the London Congestion Charge can be included. See the National Debtline factsheet for a complete list. Any excluded debts are ignored when checking if your total debts are less than £20,000.
In bankruptcy, your debts are wiped out immediately you go bankrupt. In a DRO, your debts are cleared after a “moratorium period” of 12 months. During this year your creditors are not allowed to harass you or take any action to get money from you.
If you have a big change of circumstances during the year (perhaps you get a well paid job? or inherit a lot of money?) your DRO will be revoked. This is pretty rare, see this article on why and how often this happens.
What about my partner?
If you and your partner both have debts and want a DRO then you each have to apply for one – there isn’t any such thing as a joint DRO.
If you have a DRO and your partner doesn’t, then they will become fully responsible for any previously joint debts that you had together. This applies to things like council tax arrears, not just a joint bank loan.
A DRO will not affect the credit rating of any one living at your house unless you have any joint financial products, such as a joint bank account.
Why haven’t I heard of DROs?
They were only introduced in 2008 but the main reason why there isn’t much talk about them is the absence of advertising. With IVAs, the companies offering them make a lot of money from them so they promote them – no-one makes money from you choosing a DRO so no-one advertises them.
Who does a DRO suit?
A DRO is frequently the best option for anyone where all or the majority of their income comes from benefits. If you are a pensioner, or have a long-term health condition, then it is a sensible choice. If you have a young family and a low paying job, then it could be many years before you are free of childcare costs, so again a DRO can be a very good choice for you.
If you just have a very temporary money problem then a DRO is unlikely to be your best option. It gets rid of your debts after a year, but it will remain on your credit file for six years from when it begins – this is a downside that is well worth paying if you have a difficult long term debt problem, but not for a short-term difficulty.
If you may have paid PPI on any of your debts, including debts that you have repaid, you should try to reclaim PPI before you start a DRO. You may get so much money back that you can use it settle many or all of your debts so you won’t need a DRO at all! This may sound unlikely but some people have had big surprises with the amount of PPI compensation they receive, see How PPI can get you out of debt!
Pros gets rid of debts when you have little or no money to repay them each month, low-cost, fairly simple
Cons restrictive set of criteria, will affect your credit record for 6 years, may affect your job (very unusual)
Debt Camel says If you owe less than 20k and have no realistic chance of repaying it, a DRO could be an excellent solution for you
How to set up a DRO
You have to apply through an approved debt adviser, called an Approved Intermediary. Debt Camel suggests using Citizens Advice (they set up over 50% of DROs) or National Debtline if you prefer to do this on the phone.
You will be sent an application pack to complete.
If you have anything on Hire Purchase, you have any non-standard debts (not simple credit cards, store cards or loans) or you are owed any money by someone else, you need to discuss this with your adviser. Also discuss what happens to bills such as council tax and utilities if you owe money here and you have a partner.
If you are concerned about how ‘spare income’ is calculated – people often ask if they can include things like broadband costs and pet food in their expenses – talk to your adviser. If you have drawn up a Financial Summary beforehand, so you already have thought about what your current bills and expenses are, this will help.
The £20,000 limit is absolute, so to ensure that you will meet this at the time the application is approved your adviser will not put your name forward if your debt is close to the limit, as more interest being added could take you over the top. You can’t leave a debt out of your DRO to get under the 20k limit. Because of this, if your debts are getting close to 20k you may need to make a decision fast.
Your adviser does almost all the necessary checks before submitting your application. This makes the process of approval very fast:
- there is no court hearing;
- no-one visits your house;
- checks are made on your credit reference file by the Official Receiver – if you appear to have assets or debts that are not listed on your application you will be asked about them. But you won’t be refused a DRO because you live with someone who has assets or a good income.
- DRO applications are usually handled within 2 working days of being submitted;
- in 2015/6, there were about 25,000 DRO applications and more than 98% were approved.
I have collected together some common questions about the application process here:
When your DRO application is approved, you will be sent a letter by the Official Receiver (called the Debtor’s Notice) confirming this and listing the debts which are included in your DRO.