Debt Relief Orders (DROs) were introduced by the Government in 2009 as an alternative to bankruptcy for people in certain circumstances. A DRO can only be set up by an approved intermediary, which could be a company or an individual debt adviser. Like bankruptcy, a DRO is a form of personal insolvency that involves the Official Receiver (OR).
Eligibility criteria for a DRO
You must meet a set of strict eligibility criteria to qualify for a DRO. These are:
- You must have debts totalling no more than £20,000 that you can’t afford to repay
- You can’t own a property or any other assets worth over £1,000
- Your disposable income must be less than £50 a month
- You must live in England or Wales, or have lived or worked in either country within the last three years
- You can’t have had a DRO in the last six years and you mustn’t be involved in any other personal insolvency proceedings, such as declaring bankruptcy or an IVA.
The application process
If your debt adviser decides that a DRO is the right way to manage your debts, they’ll arrange for an approved intermediary to apply to the OR on your behalf. You won’t have to go to court, but you will have to pay court costs of £90 (this is much less than the costs you have to pay with bankruptcy).
How a DRO works
If the OR approves your application, a ‘moratorium period’ will be placed on your debts. This effectively freezes them, relieving you of the burden of making monthly repayments and stopping further interest and charges accruing. Your creditors will be barred from trying to recover the debts, so you’ll have legal protection whilst the moratorium period is in place.
The moratorium usually lasts for 12 months, giving you breathing space to sort out your finances and get back on your feet. If your circumstances haven’t improved when the period comes to an end, the OR will order your debts to be written off so you can make a fresh start.
However, if your circumstances do improve during the moratorium period, your DRO may be cancelled, in which case you’ll have to start repaying your debts again. Your creditors can also apply to the DRO to have your moratorium period extended if they think you may be able to start repayments again if you’re allowed more time.
The OR can also extend your moratorium period by three months if it looks like things are starting to improve towards the end of the original 12 month term. If this happens, you’ll still have legal protection, but you’ll need to agree with your creditors how to repay your debts when the DRO ends.
Just like bankruptcy, a DRO legally obliges you to comply with certain restrictions. You must not:
- Obtain credit of more than £500 without telling the lender about your DRO
- Act as a company director
- Set up, run or manage a company without the OR’s permission
- Manage a business without telling your customers and suppliers about the DRO.
These restrictions will continue throughout your moratorium period. However, they may be extended if the OR feels your conduct justifies this, for example, if you obtained credit by fraudulent means.
If this happens, you’ll be asked to accept a Debt Relief Restrictions Undertaking (DRRU). If you refuse, the OR can apply to the court for a Debt Relief Restrictions Order (DRRO) to be made instead, which will involve a court appearance.
A DRRU or DRRO lasts between 2 and 15 years and involves exactly the same restrictions as those imposed by the DRO itself.
Other things to consider
- A DRO is not a meal ticket. You’ll still be responsible for paying everyday costs such as rent and utilities.
- Some types of debt can’t be included in a DRO. These include secured loans, student loans and court fines. You can seek independent advice about how to repay these.
- You may need to close your existing bank or building society account, and tell your new provider about your DRO.
- The DRO will stay on your credit file for at least 6 years from its start date and could make it harder and more expensive for you to obtain credit in the future.
- Your DRO will be recorded on the public Insolvency Service Register, although it won’t be published in the papers.
- You’ll need to disclose full details of your financial circumstances to the OR, keep them informed of any changes during the DRO and cooperate with them at all times.
- If you don’t cooperate with the OR and/or deliberately withhold information and/or obtain further credit that doesn’t comply with the DRO’s restrictions, your DRO may be cancelled. This could lead to your bankruptcy.
- You may be prosecuted in court if you obtain further credit and don’t tell your new lenders that you’re in a DRO.