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 long list of criteria you have to meet. Ms G is renting, her debts are less than 30k – those are important DRO criteria. But there are some others as well. For example she has to have less than £75 a month “spare income” after paying all her essentials bills and expenses, and she can’t own a car worth more than £2,000.
(The limits for DROs changed in Summer 2021 – these are the new limits)
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 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 £30,000 – 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 much higher than the £90 DRO fee, so Ms G may need to make the decision while she still has enough money left to pay the bankruptcy fee;
- 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.