Debt relief orders: A lifeline, but not an easy way out

By Emma Lunn

If you're buried in debt, an individual voluntary arrangement or bankruptcy is not your only option. Some debtors may be eligible for an alternative measure called a debt relief order (DRO), which can free you of debts in as little as one year.

Who can get a DRO?
DROs are a relatively new option for those in debt introduced by the government in April 2009 in England and Wales. Simply put, you have to have a very low income to qualify. debt-relief-order

To be considered for a DRO, your situation must fit the following criteria, says Consumer Credit Counselling Service (CCCS) spokeswoman Una Farrell:

  • You must owe less than £15,000 in unsecured credit debts.
  • You must NOT be a homeowner.
  • You must have no more than £300 assets (although one car up to the value of £1,000 will be exempt).
  • You must have less than £50 a month in income left over after you've paid all of your living costs.

How does a DRO work?
If the Insolvency Service, the same government body that grants bankruptcies, grants you a DRO, your debts are frozen for a period of 12 months. The order will contain a list of creditors the DRO applies to. They'll be told about the DRO and won't be able to pursue you for money.

If your circumstances have not improved after 12 months, your debts are discharged. Some of the debts included in a DRO are:

  • Credit card debt and loans
  • Overdrafts
  • Rent and utility bills
  • Council tax

Yet DROs don't cover all debts, specifically student loan debts and child support payments.

Not an easy way out
A DRO might sound like a good way to be free of your debts in record time,  but there are downsides. For example, while the DRO is in effect, you have to play by certain rules.

"Some of the consequences of taking out a DRO are that your bank account may be frozen, you must not take out credit of £500 or more without telling the lender that you have a DRO, and, if you rent your home, your tenancy could be affected," says National Debtline spokesman Paul Crayston. "Check your tenancy agreement to see if it states that you are not allowed to have a DRO."

A DRO could also affect your job if your employment contract states that you are not allowed to have a DRO. There will be certain public office positions you won't be allowed to hold. You also won't be allowed to set up your own business without getting permission from the court.

While the DRO is in effect, you'll find it very hard to borrow money -- and that includes getting credit cards. Moreover, the DRO will stay on your credit report for six years after it's finished, which will also affect your ability to borrow money at affordable interest rates.. If your financial situation improves while you have the DRO -- for example, you inherit some money or get a better paying job -- you're obliged to inform the Official Receiver (the body that grants DROs) and will probably have to use the extra money to repay the parties  you owe.

Not disclosing financial improvements or borrowing money without telling the lender about your DRO could leave you subject to a "debt relief restriction order." This can extend the DRO restrictions (not being able to start a business, needing permission to borrow money, etc.) for up to 15 years.

Applying for a DRO
DROs are agreed to by the Insolvency Service. You can apply for a DRO only through an approved intermediary, says a Money Advice Service spokesperson. These are people who have been approved by government-sanctioned organisations.

Many debt advice charities have such intermediaries (and can tell you if a DRO is right for you). Once you've applied for the DRO and paid the £90 administration fee (which can be paid in instalments), an Official Receiver, the court's bankruptcy officer, will review your application  and approve you for a DRO if you are eligible.

See related: A guide to the bankruptcy process, How to prepare for your first meeting with a credit counsellor

Published: 21 August 2012