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 (This limit was increased from £15,000 in October 2015)
- 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. (nb Some types of debt cannot be included in a DRO, such as student loans and court fines.)
There is no discretion to leave debts out just because it would be more convenient, so that covers cases (1) and (2) above. (3) is also ruled out – 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 gray areas: statute-barred debts and secured debts.
If a debt is very old and you haven’t had contact with the debt collector for years, it may be statute-barred, in which case it doesn’t have to be included in a DRO. However this is a complicated area because it is frequently not clear if a debt is statute-barred and the advice from the Insolvency Service is that the rule of thumb should be to list the debt if there is any doubt.
If you are trying to find the details of an old debt, checking your credit record is the first place to start.
If including the debt will not take you over the £20,000 barrier, then there is no downside to listing them on your DRO application even if you think it is statute-barred. If it would take you over the limit barrier then you need to discuss this with the Approved Intermediary that is drawing up your DRO application.
The secured debts being discussed here are Hire Purchase debts – you can’t have a mortgage, because you aren’t eligible for a DRO if you own a property, even if it has a lot of negative equity.
If you have any arrears on a HP agreement, the debt 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.
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. It is a complex area, see this guidance note.
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 on how much of the refund to pay to which creditors.
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.