Debt Relief Order (DRO)
A Debt Relief Order (DRO) is a formal insolvency option, ideal if you have debts under £20,000.00 and have little or no assets or surplus income. The cost of a DRO is £90.00.
An application for a DRO can only be made via an adviser called an ‘approved intermediary’. Applications are sent to the official receiver ( a government official) via a special on-line system without the need to go to court. The official receiver will then deal with your application.
You cannot apply directly to the Insolvency Service yourself, you must get advice from an approved intermediary first, they will check that your eligibility for a DRO and that it is the right option for you, The DRO intermediary will give you advice and make the application on your behalf.
The following is a typical list of eligibility criteria to qualify for a DRO:
- unable to pay your debts
- have total debts of £20,000 or less on the date the application is approved by the official receiver
- have realisable assets of £1,000
- not have a car or motorbike worth £1,000 or more (disability adapted vehicles are usually excluded)
- have £50 a month or less spare income after normal household expenses are taken into account
- live in England or Wales (or have lived or run a business in England or Wales in the last three years)
- not had a DRO in the last six years
- are not a company director or trustee of a charity (some other professions may be affected by a debt relief order, your interemediary will give you more detailed advice)
If you and your partner both require a DRO, you need to make separate applications and each pay the £90 application fee. If you have a joint debt and only one of you applies for a DRO the other party will remain liable for the joint debt. You will not be able to apply for a DRO if you are already bankrupt or have an individual voluntary arrangement (IVA).
- Most types of debt can be included in your application as long as your total debts are no more than the £20,000. It is important to include all of your debts, in the application. If you leave a debt out, it cannot be included later. Priority debts include; rent arrears, gas and electricity debts with your current supplier, arrears on your phone bill if you need to keep it as an essential service, council tax, business rates and community charge arrears, income tax, VAT and National Insurance arrears.
You must include priority debt arrears, but you will need to pay your ongoing payments for example rent, energy bills, council tax bills. Non-priority debts include; water arrears (but check status), credit cards and store cards, bank overdrafts and bank loans, loans to finance companies, catalogues, home-collected credit, benefit overpayments, family or personal debts, hire purchase and conditional sale agreements if you are in arrears (if you are not in arrears you may be able to exclude this type of debt in certain circumstances), hire agreements, parking penalty charges, and mortgage shortfalls. You may also owe debts from a small business such as: money owed to employees, debts to customers who have paid for goods or services that were unable to be supplied and debts to suppliers.
- Although they still have to be listed in the DRO application, some debts do not count towards the £20,000 limit. Therefore you are still liable to pay these debts in full. You cannot include:
- magistrates’ court fines
- maintenance, Child Support Agency (CSA) and Child Maintenance Service (CMS) payments and arrears
- student loans
- budgeting loans and crisis loans
- money owed under a ‘criminal confiscation order’; and
- debts resulting from certain personal injury claims against you
You will need to continue to pay ongoing payments on these debts and include them in your outgoings section.
Hire Purchase and Conditional Sale
If you are not in arrears, with your hire purchase (HP) or conditional-sale agreement you have the option to leave it out of your DRO. However, future payments towards the agreement will only be allowed if the item is necessary to satisfy the basic domestic needs of you and your family. Alternatively, payments under the agreement could be made by a third party, such as a family member or friend. If you are in arrears it cannot be left out of your DRO. In addition, if you have a vehicle on an HP or conditional-sale agreement and it is worth more than £1,000, the payments would not be treated as an allowable expense in your DRO. Therefore, you would have to include the debt, unless a third party is willing to take over the agreement for you.
You should also check your hire purchase or conditional sale agreement as it may contain a clause which allows your creditor to end the agreement if you get a DRO.
Interest and Charges on Debt
Creditors can continue to add interest and charges to your debts up until your DRO is approved. Therefore, your debts could rise to above £20,000 if they are close to this limit.The official receiver will not approve your DRO if the debt is exceeding the limit and you will not get the DRO fee back either if this happens.
Private pensions approved by Her Majesty's Revenue & Customs (HMRC) do not count towards your £1,000 asset limit. There is a small number of private pensions, not approved by HMRC that will count as an asset. Money you receive from a pension will be treated as income when deciding whether you qualify for a DRO.
You can have assets worth up to £1,000 and still qualify for a DRO. Basic household items such as cutlery, crockery, cookers, televisions, beds or furniture do not count as assets.
The value of your assets is worked out using the resale value, not how much the item was worth when you bought it. Examples of assets may include antiques, luxury items or valuable collections, stocks, shares, premium bonds and savings.
If you own a car or motorbike, then your adviser will need to check the value using Parker’s Guide. If it is worth less than £1,000, then it will not be taken into account as an asset. If you have a specially adapted car because of a disability you should discuss this with your intermediary.
After a DRO is approved
If the official receiver approves your application, you will receive a letter to confirm that you have been given a DRO. The creditors listed in your application will also receive a copy of the order. Your creditors may object to; the DRO being made, being included in the DRO or to the details of their debt as listed in the DRO.
The official receiver will also check the details that you have provided in your application by contacting a credit reference agency. If your DRO stands, all the debts that are included in the order are put on hold for a period of 12 months. This is called the ‘moratorium period’.
Statements from Creditors
Under the rules in the Consumer Credit Act 1974, your creditors are likely to keep sending you annual statements, as well as arrears and default notices in a set format. This will happen during the 12 month moratorium period but should stop after that.
Changes in your circumstances
You risk your DRO being revoked if you have not given the official receiver accurate information about your income, assets or debts. Criminal or civil action may also be made against you. You must also tell the Insolvency Service about changes in your circumstances, including any increase in income, a change of address, or if you come into any money, you do not need to notify changes in your expenditure as long as they would not affect your DRO eligibility. If your circumstances change so much during the moratorium period that you no longer meet the criteria, your DRO may be revoked.
The following restrictions apply once you acquire a DRO;
- you must not take out credit of £500 or more without telling the lender that you have a DRO
- You cannot run a business in a different name without telling everyone you do business with, the name you used for your DRO
- You cannot be involved with the promotion, management or formation of a limited company, or become a company director without getting permission from the court
- You may not hold certain public offices
- You cannot apply for a DRO again for six years
Debt relief restrictions orders
If the official receiver finds that you have not been honest and open about your finances either before or during the DRO, or they decide that you have behaved irresponsibly, they may ask you to agree to a ‘debt relief restrictions undertaking’.
If your DRO application is successful, your bank account will not necessarily be frozen. It is down to the discretion of your bank or building society as to whether they will keep your account open. If you have a debt with your bank or building society, it is likely that your account will be frozen after your DRO is approved. Please see our web page 'Basic Bank Accounts - Safe and Basic'.
There is nothing to stop you applying to open a new bank or building society account when you have a DRO, but the bank or building society may ask you if you have a DRO. It will be the decision of the bank or building society as to whether they will let you open an account with them.
Your DRO information will be kept by credit reference agencies for six years. During the 6 years, you might have problems with private renting as some tenancies have insolvency clauses in them.
After six years, your ability to get a mortgage could still be affected, because lenders may ask if you have ever been made bankrupt or had a DRO.
Money Advice Service Debt Advice Locator
Individual Insolvency Register
The Insolvency Service
Insolvency enquiry line 0300 678 0015
The Debt Relief Order Unit
1st Floor Cobourg House
T: 01752 635 200
Payzone UK Ltd
T: 0844 2090 555
The Post Office
T: 08456 11 29 70
Parkers Guide Car Valuation