Choosing between a Debt Relief Order (DRO) and other debt solutions is often a pretty easy choice! Let’s look at when a DRO is a good option for you and what the alternatives might be.
Debt Relief Orders
DROs are a form of insolvency in England, Wales and Northern Ireland. They have a strict set of conditions that have to be met – you must owe less than £20,000, you can’t own a house etc. They are meant for people who have little or no spare income.
In a DRO, you make no payments to your debts for a year and at the end of that, your debts are wiped out. During this year you can’t borrow more than £500 without telling the lender about your DRO and you can’t be a company director.
Like a jig-saw, your situation has to be exactly the right shape for a DRO to be possible. Unlike the other main debt options (DMPs, IVAs, bankruptcy) the criteria are not flexible – you have to tick all the boxes or you can’t have a Debt Relief Order.
If you are unsure if you do meet the criteria, contact National Debtline. They are an authorised intermediary who can set up a DRO for you, and they can talk you through the other alternatives if a DRO is not possible for you.
The alternatives to a DRO
If you do meet the criteria for a DRO, will any of the alternative debt solutions be better for you? Each of the major debt options is discussed in detail in the Debt Solutions section, including their pros and cons and how to set one up, so this post just highlights the differences with a DRO.
A common theme through these comparisons is that the alternatives all have to be based on a realistic budget. You may be able to manage without buying any clothes or having an emergency fund say for a few months, but if it’s going to take years to clear your debts, then any alternative that demands you live on too restricted a budget should probably be ruled out.
Snowballing or DRO ?
Snowballing is only possible if you can pay at least the minimum amounts to your debts each month. If you can do this, then snowballing is going to be a better option for you than a DRO, as with snowballing you will end up with a great credit record. But in a DRO you have less than £50 a month spare income to pay off your debts, so snowballing is rarely going to be possible alternative.
DMP or DRO ?
It is useful to divide Debt Management Plans into temporary ones and long-term debt solutions.
A temporary DMP is a stop-gap. Some common situations where you may need a DMP for a few months or even a couple of years include:
- recovering from an accident or illness that means you can’t work;
- job hunting after redundancy;
- knowing your child care costs will decrease a lot in a couple of years.
If after this short period you will be able to pay your debts, then a DMP is an excellent solution for you.
If you want to use a DMP as the way of clearing your debts, then the important thing is to work out how long it will take. If this is a few years, fine. But if you are only paying off £50 a month, then a DMP may take a very long time – the Financial Conduct Authority has described these long DMPs as unsuitable. If this is the case, a DRO is probably a better option for you as it will clear your debts in a year.
IVA or DRO ?
You may think you won’t qualify for a DRO because an IVA firm has said that you should pay say £100 a month to an IVA – in that case you might assume that you wouldn’t pass the “£50 a month spare income” test in a DRO… but the way the calculations are done is very different:
- if your only income is state benefits then you are automatically going to meet the £50 DRO test;
- the allowable expenses in a DRO are based on something called the Common Financial Statement – in an IVA the allowable expenses are usually based on much tighter criteria.
As a result, you could easily seem to have a lot more than £50 a month to pay in an IVA but still qualify for a DRO. If you are unsure about this, call National Debtline and ask them if you will qualify for a DRO.
Overall, IVAs are more expensive, uncertain and take longer than a DRO – there aren’t any situations where you should choose an IVA if a DRO is a possibility.
Some state benefits can appear generous. Your IP may have assessed your possible IVA contribution at say £90 because they have not allowed enough additional expenses because of your disability. You may therefore think that you won’t meet the DRO criteria – but you will!
Bankruptcy or DRO ?
There are very few situations where it is better to go bankrupt if you could go for a DRO. The bankruptcy fees are much higher, the forms are longer and you may have to make monthly payments for three years…
Among the unusual exceptions are:
- if you have very incomplete records of your debts – normally the adviser that helps you set up the DRO can help fill in most of the gaps, your credit record can be a good starting point. But if there could be many debts you can’t remember, then bankruptcy could be more certain as it wipes out all debts, whereas a DRO only gets rid of ones that are listed.
- if you expect your situation to improve in the next 12 months – if it does than a DRO may be revoked, but bankruptcy would carry on.