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 really rare – only one in a hundred DROs are revoked.
The DRO limits on assets and spare income
(The DRO limits were increased in June 2021. These are the new ones.)
DROs have two important limits which matter if you get some more money:
- you cannot get a DRO if you have more than £75 ‘spare’ income each month that you could pay towards your debts;
- 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, but it is unlikely that small increases will result in revocation unless you were close to the surplus income limit when your DRO started.
You don’t have to tell the OR if one of your benefits has gone up, usually in April, because of a small inflation rise.
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 or Housing Benefit may be reduced if you are earning more. So you may not be much better off.
A new Income and Expenditure assessment may be needed, so any increased costs will be taken into account. For example, if your benefits went up because you have had a baby, your costs will also have gone up. Your advisor will be able to help with this.
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”
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. This includes:
- a bonus from work;
- a valuable gift;
- money or property you inherit;
- money received from claims such as PPI or payday loan 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 that set up your DRO as soon as possible.
Some special cases:
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.
What matters here is the date the person died, not the date you actually receive 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.
DRO revocations are rare!
In November 2018, the 250,000 DRO was set up. At that date there had been 2,437 revocations, so about 1% of all DROs.
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 had debts that exceeded the total limit.
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, less than ten a year.
My DRO is being revoked – what can I do? 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!
The other main possibilities are:
- using the windfall to make full and final settlements on your debts;
- a Debt Management Plan; and
- 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.
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.
The Insolvency Service now says that you can apply for a further DRO after revocation. But they add that this does not mean that the application will automatically be approved as “the DRO team will need to consider the reason for the revocation decision and when this took place in relation to the submission of the new application“.
At the moment (October 2021) we don’t know how the DRO team at the Insolvency Service will make these decisions. I suggest you talk to a debt adviser about your revocation and, what happened and see if the debt adviser thinks it’s worth trying for another DRO.
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 thinking of a DRO. ;
- if you think 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.
- you should avoid starting 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 going for a DRO.
As you can see from the statistics above, revocations are pretty rare!
If you want to know more about DROs read this Guide to Debt Relief Orders.