In the UK, a Debt Relief Order is a form of debt relief that enables individuals with limited assets and income to manage their debt. Its objective is to assist debtors with limited capacity to repay their obligations in attaining financial relief via debt cancellation.

If you are in debt, this may be a good option if you have multiple debts in one go. This post will explain a debt relief order and how it can help you if you are in debt.

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Why is a debt relief order necessary?

In the UK, a debt relief order is a legal process that enables individuals with comparatively modest debts to address and resolve their financial challenges. This is an indispensable alternative for individuals lacking the essential surplus income to establish a voluntary arrangement or declare bankruptcy.

It’s aimed at people with few assets, very little spare income each month and qualifying debts of no more than £50,000. In England and Wales it’s free to apply, so it can be a realistic route for people who couldn’t afford bankruptcy or keep up the payments an individual voluntary arrangement needs.

It alleviates the stress caused by legal action threats and harassment from creditors. Creditors appointed under a debt relief order are precluded from pursuing additional measures to recoup their funds without the court’s permission.

It grants the individual the opportunity to restart their life after 12 months. Although the debts are written off, most debt categories may be included.

Who is eligible to obtain a DRO? – Further useful information

DROs are available in England and Wales, and separately in Northern Ireland. The two schemes use the same money limits but are run by different bodies. Scotland doesn’t have DROs at all (see below).

England and Wales

You can usually get a DRO if all of the following apply to you:

  • You can’t pay your debts.
  • Your qualifying debts must not exceed £50,000. Excluded debts (see below) don’t count towards this limit.
  • Your monthly surplus income, meaning what’s left after tax, National Insurance and normal household expenses, must not exceed £75.
  • The total value of what you own must not exceed £2,000. Some things aren’t counted, such as household essentials, tools you need for work and one ordinary domestic motor vehicle with a maximum potential realisable value of less than £4,000. A vehicle specially adapted because of a disability isn’t counted, whatever it’s worth.
  • You live in England or Wales, or have lived or carried on business there at some point in the last 3 years.
  • You haven’t had a DRO in the last 6 years, and you’re not currently in another formal insolvency procedure such as bankruptcy or an IVA.

It’s free to apply. The £90 application fee was abolished on 6 April 2024, and the debt and vehicle limits were raised on 28 June 2024.

Northern Ireland

Northern Ireland has its own DRO scheme, run by the Insolvency Service of the Department for the Economy. The limits match England and Wales: debts of up to £50,000 (not counting excluded debts), other assets of no more than £2,000, a car worth up to £4,000, and no more than £75 a month in disposable income. You must be domiciled in Northern Ireland, or have lived or carried on business there in the last 3 years. Applying has been free since 17 June 2024, and you apply through an approved intermediary in the same way.

Scotland

DROs aren’t available in Scotland. If you live in Scotland, the closest equivalent is the Minimal Asset Process (MAP), a simpler form of bankruptcy for people on low incomes with few assets. The other options are a Protected Trust Deed or a payment plan under the Debt Arrangement Scheme (DAS). Speak to a free debt adviser in Scotland to find out which one suits you.

Excluded debts don’t stop you getting a DRO

Having a student loan, a court fine or child maintenance arrears doesn’t make you ineligible. These are excluded debts. You list them on your application, but they don’t count towards the £50,000 limit, they aren’t covered by the DRO and you’ll still need to pay them. In England and Wales, the excluded debts are:

  • fines imposed for criminal offences, including compensation orders
  • student loans
  • child support and anything you owe under family proceedings
  • obligations under a confiscation order
  • damages for death or personal injury
  • Social Fund budgeting and crisis loans

Debts arising from fraud are treated differently. They’re qualifying debts, so you include them in the DRO, but they aren’t written off at the end of the 12 months. Northern Ireland has a very similar list of excluded debts, set out in the Department for the Economy’s guide.

What is the process of a debt relief order?

An eligible applicant will submit an application for a DRO via an authorised intermediary. This is typically a debt advisory organisation or an insolvency practitioner.

1. Declaration on an application form that complete repayment of all creditors and debts is not possible 2. Your application must be submitted to the Insolvency Service through an authorised agent.

There’s no application fee in England, Wales or Northern Ireland, and the approved intermediary isn’t allowed to charge you for helping with the application.

On approval, a moratorium of twelve months commences. Named creditors are prohibited from pursuing payment from you at this time. If all conditions are satisfied by the conclusion of the moratorium. In that case, your debts will be discharged, granting you legal release.

What are the pros and cons of a DRO?

Pros

  • It can thoroughly discharge unaffordable debts.
  • Precaution against creditor actions throughout the moratorium.
  • There are no assets subject to seizure by creditors.
  • Typically, this is a more expeditious resolution than insolvency.
  • Low-cost alternative with no recurring charges.

Cons

  • Your credit score will be adversely affected.
  • You might be required to make additional payments with your surplus income.
  • Debts have been written off formally for twelve months.
  • Approval of a DRO may be impeded by objections raised by creditors.
  • Afterwards, some lenders might be unwilling to lend to you.

Which obligations are consolidated in a DRO?

DROs protect against the majority of unsecured debts, including:

  • Credit accounts
  • Keep documents
  • Individual credit
  • Obtaining payday loans
  • The use of overdrafts
  • Bill’s delinquency for utilities
  • In arrears rent

Excluded debts, such as court fines, student loans, Social Fund loans and child support, aren’t covered (see the list above). Fraud debts are included in the DRO but aren’t written off at the end. Secured debts such as logbook loans and mortgages aren’t affected by a DRO.

In what circumstances is a DRO a viable option?

A DRO may present itself as a viable debt resolution option for individuals with limited assets, insufficient discretionary income, and an inability to repay timely debt. It allows for a new beginning to be established after 12 months. Nevertheless, it will hurt your credit score.

It is essential to consult a professional debt advisor to determine whether or not the debt is appropriate, given your circumstances. Obtaining a Debt Relief Order is typically initiated by an authorised intermediary, a debt advisory organisation or an insolvency practitioner. They will evaluate your situation, ascertain that you satisfy the prerequisites, and proceed with the application submission on your behalf.

If circumstances change during the 12-month moratorium of a Debt Relief Order, such as acquiring assets or having your income go over the £75 monthly surplus income limit, you must notify the Insolvency Service. Neglecting to do so may lead to the revocation of the DRO.

Final Thoughts

In conclusion, a Debt Relief Order grants individuals who cannot repay their debts a lawful avenue to have them discharged within twelve months. It is a less expensive alternative to declaring bankruptcy, but applicants must satisfy eligibility requirements regarding modest income and assets.

As DROs affect credit ratings, alternative debt resolution strategies might be more suitable. Individuals in financial hardship ought to seek counsel before pursuing a DRO.

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