Debt Relief Orders (DROs) are 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 decide to ‘revoke’ your DRO – this means the DRO is effectively cancelled and you are back owing your debts. But this doesn’t often happen – the OR has discretion about whether to revoke a DRO and in practice revocations are rare.
The DRO limits on assests and income
DROs have two important limits which matter if you get some more money:
- you cannot get a DRO if you have more than £50 ‘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 £1,000.
If you get some extra money or your income increases this may take you over these limits. In these cases the Official Receiver will decide if your DRO should continue or if it will be revoked – that is the legal word for cancelling your DRO. The Insolvency Service says:
the decision to revoke following a change of circumstances is no longer being so strictly applied, with revocation now only occurring if the creditors could be expected to benefit if the DRO was revoked.
My income has increased
You need to inform the DRO Unit of any increases in your income, but it is unlikely that small increases will result in revocation. Don’t forget that you have to pay tax on the increase and any benefits such as Child Tax Credit or Housing Benefit may be reduced because you are earning more.
A new Income and Expenditure assessment may be needed, so any increased costs will be taken into account. For example, if your benefits increase because a new baby has arrived, then your costs will also have gone up.
If your income hasn’t permanently changed, for example you did some overtime in December that isn’t usually available, 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 that set up your DRO as soon as possible.
I have received some money
You must inform the OR about any money or property you receive. This includes:
- money or property you inherit;
- money received from PPI or similar reclaims such as 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.
You should do this promptly, even if you think the money is going to be covered by one of the situations mentioned below. It’s important that you don’t spend the money because if the DRO is revoked, you may want to use some or all of the money to settle your debts.
Some special cases:
A lump sum from benefits back-dating
These may sound large but they are often not a problem because this treated as “income” over the period the back-dating relates to not “capital”. So the question is would you have exceeded the “spare income of £50” limit if you had been getting the correct amount of benefits all the time.
If the benefit is a claim for disability (PIP, DLA, AA) then an extra cost line for the disability would also be included in this re-calculation. So in 2018 the government is reviewing a lot of PIP awards – if you get a backdated sum for this, it shouldn’t make a difference to your DRO as any disability benefits you receive should be offset with an expenses line labelled “adult care costs” or something similar. the net effect on your “disposable income” is then zero.
A settlement for a Personal Injury
This may not matter. The guidance says:
Personal injury payments received during the moratorium period 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.
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.
This case is covered in more detail in a separate article: Inheriting money when in a DMP, DRO, IVA or bankruptcy.
The amount you receive is important
If the value of your windfall is less than £1,000, your DRO will not be revoked if you have notified the DRO Unit promptly and the money is less than half of your debts.
If the lump sum is between £1,000 and £1,990, the OR will look at the case taking into consideration the size of your debts, health, personal circumstances, age, etc. A decision will be made on an individual basis as to whether it would be appropriate to revoke or not. To construct a couple of cases (NB these are my examples not guidance from the OR), if you inherit £1,500, then the OR is more likely to revoke your DRO if you are aged 30, in work, with debts of £5,000 than if you are 70, living on a state pension with debts of £13,000.
For lump sums over £1,990, it is more likely that a DRO may be revoked, but the OR does have discretion so you should point out any factors you think should be taken into account.
How often do revocations happen?
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.
This includes all the cases where a DRO was revoked, for example those where someone had had debts that exceeded the £20,000 limit.
So you can see that the number of people who have problems with additional income or a large windfall is in practice tiny.
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. In 2015/16 there were only five cases.
My DRO is being revoked – what should I do?
If your DRO is being revoked, you need to find an alternative debt solution. Obviously if you have inherited a lot, you can pay all your debts off! The other main possibilities are: using a windfall to make full and final settlements on your debts, a Debt Management Plan and bankruptcy.
This article I’ve been sent PPI and my DRO has been ended looks at the rare situation where you get sent a large cheque for PPI for an old complaint that had been rejected.
Implications if you are thinking about getting a DRO
If you expect your finances to recover quickly – perhaps you have been made redundant but expect to be able to get a job soon – then you probably shouldn’t be thinking of a DRO in the first place. Have a look at a token payment DMP instead.
If you think you may get a lump sum in the next twelve months – perhaps you are trying to reclaim PPI, get payday loan refunds , you have a court case underway where you may get a financial settlement, or you have asked for some benefits to be backdated – then it would probably 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!
But in all other cases, I wouldn’t let worries about whether your income might increase 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.