People sometimes want to leave a debt out of a Debt Relief Order (DRO). A DRO is a form of insolvency with very strict criteria – it is explained in detail here, including looking at the pros and cons. You can’t normally choose to leave a debt out, but this article looks at when this is possible and what happens if a debt is left out by accident.
Why not include everything?
As the DRO is going to clear your debts, the starting point should be to get rid of them all! Some of the reasons people give for wanting to leave a debt out include:
- it’s an overdraft and you don’t want the bank account closed and have to open a new one
- it’s a credit card with very little debt and you would like to keep it for an emergency
- including the debt would push the total balance over the £20,000 limit
- it’s old and you aren’t sure of the details
- it’s a HP loan and you want to keep the car / furniture etc.
The main principle – include all debts
The fundamental principle is that all eligible unpaid debts should be listed in the application for a DRO. This applies to debts which are not on your credit records.
There is no discretion to leave debts out just because it would be more convenient.
That rules out (1) – this isn’t something to worry about though, it’s now pretty easy to get one of the new-style basic bank accounts. There are great – you won’t be charged even if a direct debit is rejected. You can also have internet banking, contactless cards etc. See Getting a Basic Bank Account for a list of accounts to choose from.
It also covers (2) – you need to think about putting aside a bit of money for emergencies. Even £20 a month can add up and make all the difference.
(3) won’t work – you can’t omit a debt so that your debts appear to total less than £20,000.
If you try to leave a debt out, it will probably be discovered as part of the DRO application process. If it isn’t, then it may well be discovered by the Official Receiver’s Office who check credit records to make sure debts are not left out. If a debt is found that takes you over the £20,000 limit, your DRO will be cancelled and your application fee will not be refunded.
(4) and (5) however may come into the only two grey areas: unenforceable debts and HP debts.
An “unenforceable debt” is one where the creditor could take you to court for a CCJ and win.
The Insolvency Service says that if you have evidence that a debt is unenforceable (such as a letter from the creditor or a court order) and don’t want to include it in your DRO because it would take your total debts over the £20,000 limit, then it does not have to be listed.
This can happen for a number of reasons but the two common ones are:
The debt is statute barred
If a debt is very old and you haven’t had contact with the debt collector for years, it may be statute-barred, which would make the debt unenforceable. It is not always easy to tell exactly when a debt becomes statute barred, especially for debts such as overdrafts. If you have an old debt you haven’t paid for more than six years, discuss this with the Approved Intermediary that is drawing up your DRO application.
The creditor can’t produce the CCA agreement
For credit cards, catalogues, HP agreements and most loans, if the creditor cannot produce a Consumer Credit Act agreement for your debt it is unenforceable. So if you ask for this and they reply that it cannot be located you could use this letter as evidence to leave the debt out.
The problem here is that it is a possibility that the agreement could be found later – if it is the creditor could then chase you for the debt as it has not been included in your DRO. And if including the debt would have taken the debt total over the limit, the DRO is likely to be cancelled – the legal term for this is “revoked”.
Also you need to allow plenty of time for the creditor to find the agreement. The Act says the debt is unenforceable if they creditor hasn’t produced it within 12 days, but in practice the debt collector often has to ask the original creditor for this and it is quite likely that it can be found within a couple of months. After several months it gets much less likely!
Hire Purchase debts
If you have any arrears on a HP agreement, it has to be included in your DRO and after a DRO you are not allowed to make any repayments to those arrears. There is no discretion here. If a friend or relative can take over paying this debt you may still be able to keep the item.
Some HP agreements have a term which says that the agreement is terminated if the borrower becomes insolvent, which includes having a DRO. If this is the case, then the debt has to be included in your DRO. If you are unsure about this, your Approved Intermediary will be able to tell if this applies to you.
If you do not have any arrears, then you can choose to leave the HP debt out of your DRO application. The future payments you need to make to the lender will be allowed if the item is classified as “part of the basic domestic needs of the debtor and his family”. You need to discuss this with the Approved Intermediary putting forward your DRO because it is a complex area.
If you are the guarantor, the debt can be included if you are paying the loan but not if, so far, the borrower is continuing to pay.
If you are the borrower for a guarantor loan, it must be included in your DRO, even though the lender will then go after your guarantor.
See Guarantor loans and insolvency for details and your options.
What happens if you forget to include a debt?
If you forget a debt by accident and it is not picked up by the Approved Intermediary but emerges after your DRO application has been made, then if the debt would take you over the DRO limit, your DRO will be cancelled.
If your total will still be under the limit then your DRO will not be affected but the debt will not be included in the DRO so at the end of the DRO period, you will still owe the money. This is unlike bankruptcy, where all debts are wiped out even if they were not listed on the bankruptcy petition.
What can you do if you are over the limit?
Trying to repay the debts for a while to get them under the DRO limit often doesn’t work very well because you don’t have much spare money and interest or charges may be added faster than you can clear them.
Two possibilities that may work for you are:
- trying to reclaim PPI – see How PPI can get you out of debt! for details. Have a go even if you don’t remember having any PPI or if you don’t think it was mis-sold, because you may have been signed up without realising it or the policy may have been wrong for you so that you could never have made a successful claim on it. You don’t even need to remember your account details if the loan or card was from one of the big banks
- trying to get interest on payday loans refunded – see How to ask for a payday loan refund for details.
Here you don’t need to get enough money back to clear all your debts, just enough to get your debt total under the DRO limit. Sometimes PPI redress or a payday loan refund won’t be sent to you but it will be used to reduce the debt you still owe – that’s fine.
If you are sent a cheque, then divide it amongst your debts, don’t just pay it off one of them as that would be “giving preference” to one creditor. If you aren’t sure about how to do this talk to an Approved Intermediary about setting up a DRO and they will be able to advise you.
Ultimately though bankruptcy is usually the best option if you would qualify for a DRO apart from the fact your debts are over the limit. The bankruptcy fees are high but you may be able to get help with them. Don’t opt for an IVA because the bankruptcy fees look too high – that is committing yourself to making monthly payments which you really can’t afford for 5 years – a big mistake.