DROs – what if my pay increases or I get a lump sum of money?

A Debt Relief Order (DRO) is a simple and cheap alternative to bankruptcy if you are renting and have little money to spare each month to repay debts.

A DRO lasts for 12 months and during this time you must inform the Official Receiver (OR):

• if you receive any money or other assets, or
• if your income increases.

If this happens, the OR may ‘revoke‘ your DRO.  That is the legal term for cancelling your DRO so you are back owing your debts.

But this doesn’t always happen – the OR has discretion about whether to revoke a DRO. And it is rare – only one in a hundred DROs are revoked.

If your DRO is revoked, you may simply be able to apply for another one if your situation changes and you again meet the criteria.

The DRO limits on assets and spare income

DROs have two important limits which matter if you get some more money:

1. you cannot get a DRO if you have more than £75 ‘spare’ income each month that you could pay towards your debts;
2. you cannot get a DRO unless the total value of your assets is less than £2,000. (This is second-hand value, it doesn’t include normal household goods and clothes, you are also allowed a car worth up to £2,000 in addition to this.)

If you get some extra income each month this may take you over the “spare income” limit. If you get a lump sum of money or a valuable gift. this may take you over the total asset limit.

In these cases, the Official Receiver will decide if your DRO should continue or if it will be revoked.

“My income has increased”

You usually need to inform the DRO Unit of any increases in your income. There are two exceptions when you do NOT have to tell the DRO Unit:

1. if your benefits go up in April because of an inflation rise.
2. if you are getting any extra cost of living payments from April 2023. These include the £900 paid in 3 lots of about £300, the £150 if you are receiving disability benefits or the £150/300 extra if you are a pensioner who gets the Winter Fuel Payment.

It is unlikely that small increases in your income will result in revocation unless you were close to the surplus income limit when your DRO started.

Don’t forget that you have to pay tax on a pay increase and your pension contributions may rise. Also any benefits such as Universal Credit, Child Tax Credit, council Tax Support etc may be reduced if you are earning more. So you may not be much better off.

Your costs may also have gone up:

• for example, if your benefits went up because you have had a baby, you will have new expenses to do with the new child;
• in 2023 inflation is high so a lot of other expenses, from food and petrol to mobile bills and energy costs may also have gone up.

A new Income and Expenditure assessment may be needed to show whether you are actually have more money left after your extra income and increased expenses are all taken into account. Your advisor will be able to help with this. Then you may be able to tell the IS that your income has gone up but explain that here is an income & expenditure sheet that shows you still do not have more than £75 a month spare income.

If your income hasn’t permanently changed, for example you did some overtime one month, then the OR is more likely to treat the extra money as a one-off payment than as additional income.

If you aren’t sure whether you should tell the DRO Unit,
talk to the adviser who set up your DRO as soon as possible.

“I have received some money”

You have to tell the OR about extra money

In a DRO, the money you receive is not taken to pay your debts, unlike in bankruptcy or an IVA.

But getting more than £2,000 may mean that Insolvency Service decides to cancel your DRO, leaving you back with your debts.

You must inform the OR about any money or property you receive.  Update: except for the additional Cost of Living payments people are getting in 2023 – you don’t have to tell the DRO Unit about them.

This includes:

• a bonus from work;
• a valuable gift;
• money or property you inherit;
• money received from claims such as PPI or affordability refunds;
• lottery or other gambling winnings;
• a lump sum from benefits back-dating;
• a tax refund or correction to your previous year’s tax credits;
• money from the settlement of a court case.

Do this as soon as possible, even if you think the money is going to be covered by one of the situations mentioned below.

And you should inform them even if the amount you receive is less than £2,000.

If you aren’t sure whether you should tell the DRO Unit,
talk to the adviser who set up your DRO as soon as possible.

A lump sum from benefits back-dating

Here it depends on what the benefit is.

If the backdating is for PIP, DLA, Attendance Allowance or Severe Disability Premium,  it will be treated as covering additional disability expenses you had. Here your DRO will not be affected even if the lump sum is large.

If you get a lump sum from backdating of other benefits, this is treated as getting a lump sum of money. If it is more than £2000, it could lead to your DRO being ended.

A settlement for a Personal Injury

Sometimes this will not affect your DRO even if it is large. The DRO guidance says:

Personal injury payments received during the [DRO year] will be dealt with depending on the composition of the payments (special and general damages). If the compensation relates solely to general damages and is received during the moratorium period, this will not adversely affect the DRO so long as the funds are used only for living expenses and not converted into tangible assets.

Your solicitor will be able to explain whether you are getting general or special damages, or a mixture. Broadly general damages are compensation for pain and injury and these will be ignored by the OR but you shouldn’t use the money to buy an asset until your DRO has ended.

Inheriting money

What matters here is the date the person died, not the date you actually get the money. See Inheriting money when in a DMP, DRO, IVA or bankruptcy which looks at this in more detail.

Money for a special purpose

The OR will take this into account. For example, you may have been given a bonus by your employer to spend on training.

How to contact the DRO unit

When your DRO started, you will have received a notice from the Official Receiver confirming this.

That notice has the contact details for the Official Receiver.  You should use these details to contact them.

If you can’t find the notice, you can email the DRO unit at DRO.Unit@insolvency.gov.uk or phone them at 0300 678 0015.

DRO revocations are rare!

About 1% of all DROs are revoked.

Not all those revocations were because of someone getting extra money. They also include all the cases where a DRO was revoked because someone had originally had debts that exceeded the total limit when the DRO was started.

So you can see that the number of people who have problems with additional income or a large windfall is small.

It is extremely rare for a DRO to be revoked after it has completed. These are called Post Moratorium Revocations and the Official Receiver has to go to court to get one. There are less than ten a year.

My DRO is being revoked – can I get another DRO?

If your DRO is being revoked, you need to find an alternative way of dealing with your debts.

Obviously if you have inherited a lot, you can pay all your debts off! Or you could use the windfall to make full and final settlements on your debts.

Another option is a second DRO, if your situation changes so you again qualify. For example if you had a windfall or an inheritance of say £4000 and spent £2800 on essential expenditure, then you would again be under the allowed asset limit in a DRO.

Until recently, it has not been possible to get another DRO soon after one has been revoked as you can’t have more than one DRO in six years. But in 2021 this was challenged in court and the judge overruled the Insolvency Service on the basis that after the revocation the previous DRO no longer existed.

If you want a second DRO, go back to the adviser who set up the first one and talk to them about this.

The other main possibilities are:

• a Debt Management Plan; or
• bankruptcy. Bankruptcy has much the same effect on you as a DRO, so you can just use some of the money you have received to pay the bankruptcy fees. Your debt adviser can explain how to apply for bankruptcy.

Implications if you are thinking about a DRO

When you talk to a debt adviser about a DRO, do mention if you think your income may increase soon or you may get a lump sum payment:

• if you expect your finances to recover quickly – perhaps you expect to be able to get a  new job – then you probably shouldn’t think of a DRO.
• if you may get a lump sum in the next twelve months then it would be better to wait and see if this happens before deciding on a DRO. If you get enough money you may not need the DRO at all! And if there isn’t enough money for that, you can still choose to spend some of the extra money on essentials that you need and then go for a DRO.
• don’t start a DRO if you expect to retire and get a tax-free lump sum in the next year.

For all of these “wait and see” situations, look at making token payments instead until you see how things turn out.

But unless you have some specific reason to think things will change in the next year for the better, I wouldn’t let worries about whether your income might increase or you might get a lump sum stop you from choosing a DRO.

As you can see from the statistics above, revocations are pretty rare!

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