UPDATE The rules about who can have a Debt Relief Order (DRO) changed in 2021 and more changes are coming in June 2024. From that date you can qualify for a DRO with debts of up to £50,000 and the permitted value of a car you can own is being doubled to £4,000.
Thousands of people who are renting will now be eligible to apply for a DRO because of the 2021 and 2024 changes.
Many people who currently have a Debt Management Plan (DMP) or have payment arrangements (including making a low token payments) will be better off if they switch to a DRO and their debts will be cleared in a year.
DMPs and payment arrangements are simple to end and change to a DRO if you qualify for one. This article looks at the pros and cons of switching to a DRO so you can see if it would be a smart move for you.
Some people who are in an IVA would also gain a lot from changing to a DRO, their choices are different, see Should I end my IVA and change to a DRO?
Contents
The huge advantages of a DRO
If you qualify for a DRO, it will usually be better than a DMP or having payment arrangement for five reasons:
- You don’t make any monthly payments in a DRO.
- There is no upfront fee in a DRO from April 2024.
- A DRO lasts for a year – at the end of that your debts are written off.
- Once you are in a DRO, the creditors for the debts in your DRO are not allowed to add interest or charges, or take you to court for a CCJ.
- You can include most types of debts in a DRO, including CCJs, benefit overpayments, parking fines, council tax arrears and utility arrears.
- DROs very rarely fail. Only about 1% go wrong, mostly because people inherit money or have some other windfall. If your income falls or your expenses increase, your DRO just carries on, it is never extended.
So a DRO is much cheaper, shorter and less risky than a DMP or payment arrangements with your creditors.
The downsides of a DRO
The disadvantages of a DRO will matter more for some people than others.
A DRO is a form of insolvency and it has the same bad effect on your credit record that bankruptcy or an IVA has:
- when your DRO year has ended you can start to repair your credit rating, but it won’t get to be good until after the DRO marker goes six years from the start date;
- it is hard to rent privately with insolvency on your credit record unless you have a guarantor.
You can’t be a company director during your DRO year, but you can be self-employed. Talk to Business Debtline if this is an issue for you.
You can’t borrow more than £500 during the DRO year without telling the lender about your DRO.
If you get a large lump sum – over £2,000 – during your DRO year it is likely to be ended. So avoid a DRO if you want to take a tax-free lump sum from your pension or you may get a good redundancy payment in the next year.
Find out if you now qualify for a DRO
Unlike DMPs or token payments, there are some very specific criteria that you must meet to qualify for a DRO. The numbers here are the new criteria that apply from end June 2024.
The main DRO rules are:
- your debts cannot add up to more than £50,000;
- you can’t own a property. It doesn’t matter if there isn’t any equity in your house, if you don’t live there, if it can’t be sold… owning any property will stop you from having a DRO;
- if you own a car, it must be worth less than £4,000. It may be possible to keep a car on finance;
- your spare income each month after paying all your bills and expenses must be less than £75.
The “under £75” spare income is the hardest for you to assess.
If your only income is from benefits or state pension then you will always pass this “under £75” check, This is even if you get a lot of disability benefits, because a DRO allows for your extra disability costs.
If you are paying £75 or less to a DMP or in payment arrangements then you are very likely to qualify for a DRO.
But many people paying more than £75 may still meet the “under £75” DRO test. You may have expenses that weren’t properly taken into account when your DMP or payment arrangements were set up. Or your income may have dropped or your costs have risen. You may be paying too much at the moment.
I would say that many people paying £100 a month now may qualify for a DRO. And some people paying more, say £120, may qualify.
The best thing is to talk to an adviser who will check if you can have a DRO. I suggest you call National Debtline on 0808 808 4000.
If you don’t qualify for a DRO, the adviser can help you look at your other options.
Should you switch to a DRO from a DMP?
If you are told you can get a DRO, you need to decide if it is a good idea.
A key question is how long it will take to clear your debts if you don’t switch to a DRO?
If all your debts will be cleared in a few years, then it’s probably best to carry on paying them off and avoid having insolvency on your credit record.
But if it is going to take a long while, then a DRO will get you to be debt-free within a year and you won’t have to struggle to make the payments.
And if you are only making low, token payments, this may feel comfortable but they are never going to clear your debts.
Some people will worry that they will never be able to get a mortgage if they have a DRO. If that is your main financial ambition, you need to be realistic. Even if your credit record looks clean, a mortgage lender will see your DMP on your bank statements. You need to settle your debts and save a deposit before a mortgage. How long will that take if you carry on with your DMP?
How do you change to a DRO?
This is easy. You ask a debt adviser to set up a DRO for you. Call National Debtline on 0808 808 4000, or talk to your DMP firm.
The adviser will check if you qualify for a DRO – see FAQs about DRO applications for what you will be asked and how long this takes. The adviser will go through the pros and cons in more detail, explain what will happen and answer your questions. Tell your debt adviser about anything you think may change in your life in the next year.
You can carry on making your DMP payments or payments to your creditors until the DRO application is submitted. But if you need the money for the DRO fee, you could stop earlier – discuss this with your adviser.
Don’t wait for your next DMP review
DMPs are reviewed annually. At that point, your DMP firm should explain if a DRO is now an option.
But there is no reason to wait, unless your review is going to be in the next month or so. The sooner a DRO is started, the sooner you can stop making any payments. And the sooner it will end and your debts will be cleared.
Questions about DRO applications
In a DRO what happens if I get a new partner
What happens at the end of a DRO
Tracy Hill says
i already have an IVA with creditfix at £85 per month which is really hard for me to do. Can I change to a DRO?
Sara (Debt Camel) says
This may be a good option for you – I assume you are renting & owe less than £30,000? when did you start the IVA?
Tracy Hill says
i started in may 2019 and have another 56 months to go. I had just under £6000 debt to pay on the iva the rest (£7804) was written off.
Sara (Debt Camel) says
so you have had to take a payment break?
A DRO may be a very good idea for you – read https://debtcamel.co.uk/end-iva-change-to-dro/ and talk to National Debtline on 0808 808 4000 to see if you will qualify under the new rules.
Tracy Hill says
during lockdown, from may 2020 to october 2020 I got payment reductions from £85 to £68 a month however what wasn’t paid then is added at the end of the iva so would be paid eventually. In november 2020 I was made redundant so have been using redundancy money to pay bills so didn’t qualify for a break. I have been on Universal Credit since then and this month (July) I finally managed to get a payment holiday so I am not asked to pay anything in July. As you can imagine, £85 a month is a lot of money and bills suffer.
Sara (Debt Camel) says
If you are on UC you will qualify for a DRO.
the only problem would be if you then got a better paying job which meant that you could pay more to your debts than the £85 before. Is that likely in the next year?
Tracy Hill says
hi sara,
I was working part time before and could just about afford the £85 a month so a full time job if I got one would be ok but who knows if that will happen. I will give Debtline a call and see what they say. Thanks for the help.
Sara (Debt Camel) says
Good move. There are no certainties here, but the IVA path looks very difficult.
Issy says
Hi Sara started my IVa in Sept 2018 , I rent and tbh I’ve always thought I was mis old this , can I switch now to a DRO ?
Sara (Debt Camel) says
How much are you paying a month and is this affordable? Are you renting? Any assets to protect? When does your IVA end?
Issy says
Hi paying £100 a month I’m renting, no assets , Iva ends 2023
Sara (Debt Camel) says
Renting privately or council/housing association?
Are you struggling to pay the £100? are you behind on any bills?
Issy says
Hi renting housing association rents quite high and yes I struggle , not behind on bills
Sara (Debt Camel) says
ok, so read https://debtcamel.co.uk/end-iva-change-to-dro/ which looks at switching from an IVA.
I think the first thing for you to check is that you would qualify for a DRO – phone National debtline on 0808 808 400 and say you would like this assessed as you need to know whether to fail your IVA.
IF ND say you would qualify for a DRO, then you can talk to your IVA firm and explain that you could switch to a DRO, but as you are over half way through your IVA, you would loike instead to propose to your creditors that they should agree to your IVA being complated on the basis of the funds paid to date. If they agree to that, then your debts are gone and you don’t need the DRO. If the creditors refuse, then you go for a DRO.
if ND say you don’t qualify, all you can do is ask your IVA firm to reduce your payments by 15% as they are too high.
Issy says
Thank you Sara I will and let you know outcome thanks for all your advice
Lou7 says
Hi,
I am in a debt management plan and have been since 2007. I pay £170 at the moment, would I be entitled to move to a DRO or not? I have got debts now of £15000. I still have at least 8 years left to pay. Any information would be really appreciated.
Sara (Debt Camel) says
Sorry a LOT of questions…
Is the £170 affordable? If it is, it suggests that a DRO would not be approved.
Are you renting?
What happened to the large Amigo refund – did you clear other debts with that?
With a 2007 DMP you may some other options apart from a DRO… can you say what sort of debts are in it and if most of them have been sold to debt collectors?
Lou7 says
Hi
Yes the £170 is just about manageable. No my partner owns the house. Yes I cleared a lot of debt with that payout. 2 credit cards with capital one, loan with northern rock which was sold to a debt collection agency, hsbc which is with a collections agency and studio which is with a collections agency too
Sara (Debt Camel) says
if the £170 is just about manageable it is very unlikely a debt adviser will think your disposable income is less than the £75 a month it has to be to qualify for a DRO.
2 capital one cards – not been sold?
the HSBC – was this a loan, card, overdaft? Has it been sold to debt collector or is it being collected on behalf of HSBC
Studio – – has it been sold to a debt collector or collected on behalf of studio?
Lou7 says
The one capital one card was sold but then they brought it back but I keep having letters from the debt collection company asking why I haven’t paid. I have sent them proof that cap1 said they were buying it back because they were reducing the balance. HSBC was a combination of overdraft and loan which is with a debt colllection agency and studio account was sold to a debt collections agency
Harri says
I am paying StepChange 80 a month. It’s been 4 years and it’s harder now my oldest is at secondary school with more uniform and other costs would I be able to change? I don’t know when my DMP will end but it a long time as I must still owe more than 10,000. I had a revue 2 months ago but they didn’t say anything then.
Sara (Debt Camel) says
That sounds like you could benefit from switching.
I think you should contact StepChange, say why £80 is more than yoh can now afford and say you would like to switch to a debt relief order.
Tris says
My dad has just signed his car over to me as he got a nee one it’s probably worth around £2000 will this effect my dro order and do I need to do pls
Sara (Debt Camel) says
You need to talk to the adviser who set up your DRO about this.
It will probably work best if your dad still owns the car, but is just letting your drive it – will that be OK?
Jackie says
Hi wonder if you could help me, I’m currently on a DRO since May this year, I have received a back payment of disability tax credits over £4000.
I have one child who receives DLA and one child receives PIP, my question is could my DRO be revoked because of this?
If my DRO is revoked do I have to pay my creditors any money even if I apply for bankruptcy?
I was told by the people who set up my DRO that I must inform the insolvency,which I have and still waiting for a official reply which has been over a week. Has anybody had any experience with insolvency agents with a similar problem
Thank you.
Sara (Debt Camel) says
See https://debtcamel.co.uk/dro-income-up/ – it is possible your DRO will be revoked, it depends exactly what the back payment covers. You have done the right thing by telling the Insolvency Service.
If your DRO is revoked, then you do not have to pay the money to your creditors. You could choose to use some of it to buy essentials before you go bankrupt – you have been living on to little income for a long while so you may need to replace things round the home that have broken or are worn out, from white goods to new sheets and curtains. And of course if there are any purchases that will help with your children’s disabilities.
Talk to your debt adviser about what is reasonable, so £500 for a fridge freezer not £2000 for a top of the range American enormous one. ANd keep receipts. And leave enough money to pay the bankruptcy fee!
Jackie says
It is for disability element of child tax credits from 2016-2020.
I have another question regarding disability tax credit back payment, would I be able to use some of the money to take the kids on holiday
Thanks again
Sara (Debt Camel) says
Then your DRO is pretty likely to be cancelled :(
It is up to you what you spend the money on. You won’t be refused bankruptcy because of this.
The only reason to be “sensible” with the money is that if the Official Receiver thinks you have been “reckless” you may get a bankruptcy restriction order – see https://debtcamel.co.uk/bankruptcy-restriction-order-bro/ for more about these. A lot more people worry about one than actually get one. And you may reasonably decide you don’t care if you do!
If I hadn’t taken my kids on holiday for several years, I too would want to have a getaway with them. But perhaps this country not all the money to go to Florida? (probably can’t fly there anyway!)
Oh and the other reason to be sensible is that you must need to replace household stuff. This sort of sum doesn’t often land in your bank account…
Jackie says
Thank you for your advice it’s much appreciated.