DROs – what if you have a car on HP?

You can’t have a Debt Relief Order (DRO) if you own a car that is worth more than £2,000.  But what happens if the car is on HP?

A reader, Mrs T, asked:

I am drowning in debts and only just under the £30k 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 £30k.

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 clearing the finance and keep my debts under the 30k limit. There would be very little money left from the sale, 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 the criteria, for example your debts have to add up to less than £30,000.

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 £2,000.

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 worth over £2,000 you would have a problem as your DRO would be likely to be cancelled because you then broke the car asset limit.  But with 7k to repay on her car HP, this doesn’t apply to Mrs T.

Also note that if you took a loan from a bank to buy a car, that is not normally “car finance”.  There you do own the car and if it is worth over £2,000 it would mean you can’t have a DRO.

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 30k 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 £30k limit.

But when there aren’t any arrears, you can choose whether to include the HP debt or not.

There are three main situations:

1. 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.
2. 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.
3. 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 £2,000, 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 30k 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 £1000 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 30k limit it would rule out a DRO.

There is an alternative that may work 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 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.

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