You can’t have a Debt Relief Order (DRO) if you own a car that is worth more than £4,000.
But what happens if the car is on HP?
A reader, Mrs T, asked:
I am drowning in debts and only just under the total DRO debt limit. I have been advised that a DRO would be my best option. However I didn’t tell the debt adviser that I have a car on HP which I still owe £7k as this would take me over the debt limit.
I don’t need the car as I can use public transport for work so I am thinking about selling it before I apply for a DRO. That would be clearing the finance and keep my debts under the DRO total debt limit. There would be very little money left from the sale and settling the finance, approx £800 – £1000. Would this be allowed?
DROs and cars on HP can be complicated. I’ll go through some general points first. Then I’ll come back to what they all mean for Mrs T and her suggestion of selling the car at the end.
For an overview of DROs, see What is a Debt Relief Order? That covers all the DRO criteria, including the total debt limit.
A car on finance is not an asset that you own
The DRO rules say that you can only own a car that is worth less than £4,000.
But when a car is on finance such as HP, it belongs to the finance company. It isn’t yours, so it doesn’t count as an asset.
There is an exception here. If the HP ends within the year a DRO takes, you will then own the car. So it is over the DRO limit for the value of a car at that point you would have a problem as your DRO would be likely to be canceled because you then broke the car asset limit. But Mrs T’s car finance will be going on for more than a year so this doesn’t apply to her.
An HP debt may not have to be listed in a DRO
Mrs T has assumed that the 7k owing on the car finance counts towards the DRO total debt limit.
This isn’t always the case.
If there are any arrears on the car finance, the balance owing has to be listed as a debt in your DRO and so counts towards the DRO total debt limit.
But when there aren’t any arrears, you can choose whether to include the HP debt or not.
There are three main situations:
- you may want to include it because you can’t afford the repayments, you are going to hand back the car and you want the car finance debt cleared.
- if someone else, usually a family member, is prepared to make the HP payments, then you can keep the car and the debt doesn’t form part of your DRO.
- if you can afford the repayments, then this will be allowed if the Insolvency Service thinks that the car costs are an “allowable expense“. This usually means that the car is worth less than the permitted value in a DRO, but it is possible for the debt adviser setting up your DRO to propose to the Insolvency Service that you should be allowed to make the payments on a more valuable car. It will depend on how essential the car is and how expensive the payments are.
Mrs T says she can use public transport to get to work, so her car is not essential and it would have to be listed in her DRO if she still owes a balance.
If you aren’t sure about your situation, talk to a DRO adviser about this. I suggest you phone National Debtline on 0808 808 4000 or contact your local Citizens Advice.
Settling the car finance before a DRO
The 7k balance Mrs T owes would take her over the total debt limit for a DRO.
She is proposing to sell the car before the DRO to settle the debt. This sounds like a good plan. The car finance company will provide a settlement figure when you tell them you want to do this and explain what you have to do.
If she ends up with £1,000 as she hopes, this isn’t an obstacle to a DRO provided her total assets including this money from the sale of her car are under the £2000 DRO limit. £2000 may sound low but normal household belongings and clothes don’t count and expensive items are valued at their second-hand value.
But sometimes selling the car will still leave you owing money. And if that would take you over the DRO total debt limit of £50k it would rule out a DRO.
There is an alternative that may work here for some people – voluntary termination (VT) of the car finance.
Here you hand back the car to the car finance company. If you are more than halfway through the HP when you VT it, then you won’t owe any more money at all. And if you are less than halfway through the HP, then you would only owe an amount that would take you up to having made half the payments.
See How to VT a car for details about this.
What about Motability vehicles?
Here you don’t own the car – it is a lease arranged through Motability. So the car doesn’t count as an asset.
The payments for this will always be approved as they are coming from your disability benefit.
Talk about this to the adviser setting up your DRO but I have not heard of anyone having any difficulty with a Motability vehicle.
So what does Mrs T need to do?
She has to go back to the debt adviser and explain her situation and what she is proposing to do.
The debt adviser will need to check what her income and expenditure will be without the car. This will mean removing all the car expenses and adding in extra costs for public transport. She may well still qualify for a DRO but she can’t assume this is right without going through the details.
Also cars and a DRO can be complicated. I’ve made the general points here but her adviser will check her exact situation.
FAQs about DRO applications
Will more pay or a windfall affect a DRO?
Improve your credit score after a DRO
John says
What is the situation with a DRO if the car is a motability scheme car
Sara (Debt Camel) says
Here you don’t own the car – it is a lease arranged through Motability. the car doesn’t count as an asset.
The payments for this will always be approved as they are coming from your disability benefit.
The Insolvency Service says:
“Vehicles that are subject to the Motability scheme are usually lease hire agreements and are not assets for the purpose of a DRO.Payments under a Motability agreement are an allowable expense”
Talk about this to a DRO adviser but I have not heard of anyone having any problems with this.
Gary says
If you have received a default notice for your HP, then you will not be able to voluntary terminate.
Sara (Debt Camel) says
that is correct. My article on VTing a car explains this: https://debtcamel.co.uk/vt-end-car-finance-early/
Hannah says
Hi Sara
I have got another 3 years left on my lease car , i have less than £50 now a month due to my job hours been cut , for at least the next 12 months due to factors in the industry i work , I need a car to get to work but not sure how it works as it not an asset that i own .
Sara (Debt Camel) says
You are right this isn’t an asset, the question is will the Insolvency Service think this is an allowable expense. Talk to National Debtline on 0808 808 4000 and they will look at a DRO and your other debt options.
Maddie says
Hi Sara,
I am looking at getting a DRO but have a vehicle on HP. Vehicle is worth approximately 8.5k and I have another 4.5yrs of repayments of £244pm to make. I am a full-time community nurse so having a reliable car is essential in order for me to work. It is also an essential part of my contract of employment so I can’t be without a reliable vehicle or I will loose my job.
I have completed budgeting sheets and spoken to both Stepchange & National Debt. Both of whom are saying I can’t even be considered for a DRO simply because of the car but are advising bankruptcy instead.
I am not in arrears with my car payments
I note from you point above “ 3. above. if you can afford the repayments, then this will be allowed if the Insolvency Service thinks that the car costs are an “allowable expense“.
I am struggling to get either stepchange or national debth to accept that my vehicle should be seen as an allowable expense, especially as without it I will become unemployed?
Based on the current purchase value of vehicles there is no way I am going to be able to get a reliable car for 2k or the funds to buy.
Can you advise how I go about getting evidence that my car is essential for my job and if there is anything I can do to speak with an insolvency practitioner about my situation as I do not feel these charities are listening. Many thanks
Sara (Debt Camel) says
Is there an option to get a lease car through your work?
Are National Debtline saying that the car payments would be an allowable expenses in bankruptcy?
Lucy says
Hi Sara,
I’ve just read your article on DRO’s and HP vehicles. I’m considering a DRO to sort out my debts but my partner purchased a vehicle in April this year but this was done via bank loan. The car is worth £7000 and is essentially my car (as I’m the only one that drives it due to him having a company car) but it is registered in my partners name (as well as the loan used to buy it).
I am just a named driver on the insurance policy, would this stop me from getting a DRO or would this mean the car would have to go?
Thanks!
Sara (Debt Camel) says
It sounds to me as though this belongs to your partner and he just lets you drive it. This should not be a problem for a DRO but tell the adviser who is setting up the DRO about it.
Samantha says
Can I get a lease car if I have DRO I need a car for work and for my every day living due to my illness . I would have been able to keep my lease car before the DRO only someone crashed into me and it was written off and while I was waiting for it all to be sorted I ended up in a DRO not to none payments due to payments dates not matching my pay days and then ending in arrears ect. ???
Sara (Debt Camel) says
Who set up this DRO for you?
Are you in receipt of PIP?
Ashchica says
May I ask what pip matters? I’m.looking on here due to my circumstances changing and awaiting a pip decision
Sara (Debt Camel) says
Because if you get higher rate mobility PIP you can use it to lease a car through Motability which isn’t affected by a DRO
Corinne says
Hi, I’m looking to apply for a DRO for debts that are solely in my name.
My husband has a vehicle on finance with about 3 years left before it’s cleared. He pays the finance, the insurance, tax etc.
Should I be factoring these costs into the monthly outgoings too? Even though I don’t pay them? Will it help towards me applying for a DRO or would I be refused?
Sara (Debt Camel) says
do you need to use this car for your job? does your husband mainly use this car or you?
Corinne says
Hi, so he uses it for his job and I sometimes use it for school runs or shopping.
Sara (Debt Camel) says
So you need to talk to your DRO adviser about this. His HP is unaffected by your DRO, the HP cannot be listed in your DRO . Whether you are allowed to include any contributions to the cost of the car in your expenses may depend on how essential the car is for you.
nicky says
Hello – I have been advised to get DRO but have a car and only a year left to pay this off will this be taken of me i also have a private reg which i have had since young can i sign this over to my family and get this put on retention before the DRO ?
Sara (Debt Camel) says
who has advised a DRO?
what is the car worth at the moment?
how much is the numberplate worth?