The rules about who can have a Debt Relief Order (DRO) were relaxed on 29 June 2021. You can now qualify for a DRO with debts of up to £30,000 and you are allowed more assets and more spare income.
It is estimated that an extra 13,000 people a year who are renting will now apply for a DRO because of these 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?
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. The only charge is the £90 DRO fee at the start – this can be paid in installments.
- 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 main DRO rules are:
- your debts cannot add up to more than £30,000;
- 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 £2,000 (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 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.