What Is a Debt Relief Order?

Individuals facing the prospect of insolvency could benefit from a debt relief order (DRO). Intended to help people who are struggling to pay their bills, you could qualify for a DRO if you owe less than £30,000 to creditors.

Debt relief orders are an effective way to deal with your debts, but there are stringent qualifying parameters to meet first. If you do qualify for a DRO, then you don’t pay anything to your creditors for 12 months before the debts are written off completely.

In this article, we answer the question: ‘what is a debt relief order?’ before explaining how they work, how long they last and what the consequences of a DRO are.

Debt Relief Orders: What Are They?

So what is a debt relief order or DRO? A debt relief order is a formal, legally binding procedure that’s designed to help individuals escape their debt and have a fresh financial start.

As an insolvency procedure, a debt relief order works as an effective alternative to individual voluntary arrangements (IVAs) or declaring bankruptcy. Provided you meet the criteria, a debt relief order can help you turn your finances around.

But how does a debt relief order work? We’ll explain the qualifying criteria in more detail shortly, but the basic premise of a DRO is to help you by freezing your current debts for a period of 12 months. During this 12-month period, your creditors can no longer chase you for payments, and when you’re discharged, many of your remaining debts will be written off.

This might sound too good to be true, and it’s important to note that debt relief orders have their advantages and disadvantages. Not all types of debt are covered by a DRO, for example, and you will not qualify if you have an income over a certain threshold. Your credit score will also be affected for years, as the debt relief order will stay on file for six years after the discharge date.

Always speak to a professional insolvency advisor to consider your options, as there may be a different insolvency procedure that’s better suited to your personal financial circumstances.

How Do You Qualify for Debt Relief?

To fully answer the question, ‘what is a debt relief order?’ you have to understand the strict qualification procedure. To meet the criteria, you’ll need to owe £30,000 or less to creditors and have less than £75 leftover from your income each month after paying your necessary expenses.

This is a formal insolvency procedure that’s overseen by a licensed insolvency practitioner, and it has to be approved by the court. This means that your financial situation will be officially appraised, and if you do not meet the criteria, you cannot qualify for debt relief.

If you meet the following specifications, then you’ll likely be approved for a debt relief order:

• You’re legally deemed to be insolvent. This means that you cannot pay your debts as and when they arise.
• You currently live in England or Wales, or have been a resident, worked or owned property there within the last three years.
• You owe £30,000 or less to creditors (this can be owed to one creditor or multiple creditors).
• You only have £75 or less leftover from your monthly income after you’ve paid for any necessary living expenses, such as utility bills or rent payments.
• You are not a homeowner and you do not own any properties in the UK or abroad.
• Your total assets, including any savings you have in your bank accounts, do not have a total value above £2,000.
• You have not had a debt relief order approved within the last six years.
• You have not broken the terms of a debt relief order in the last six years and consequently had the DRO revoked.
• You’re not currently bankrupt or subject to other insolvency procedures such as an IVA or administration order.

To summarise: if you owe £30,000 or less, have an income of less than £75 once your basic household expenses are accounted for, have assets and savings with a value of less than £2,000 and don’t own your home, then you could qualify for a debt relief order.

How does a debt relief order work?

A debt relief order works by freezing payments you owe to creditors for a period of 12 months. After this, the majority of your debts will be wiped out, leaving you with the opportunity to start again financially.

The process of applying for a debt relief order is:

1. You recognise that your financial position is one of insolvency when you can no longer pay your bills.
2. Ask a licensed insolvency practitioner for financial advice. They’ll assess your situation and decide if a debt relief order is the most appropriate solution.
3. You must then apply for a debt relief order through an insolvency advisor. You cannot apply for one on your own.
4. You pay a £90 fee to have your application approved or denied by an official receiver, who is appointed by the courts to oversee your case.
5. The official receiver makes their assessment, checking your bank accounts, income and debts to ensure that you meet the requirements.
6. The court officially approves your debt relief order, the terms of which you must now abide by for 12 months.
7. After 12 months, you’re officially discharged from the debt relief order and all qualifying debts are written off.
8. After six years, the debt relief order is removed from your credit score.

How Long Does a Debt Relief Order Last?

So, how long do debt relief orders last? A debt relief order lasts for 12 months once the courts have approved it. It may take several weeks for your DRO to be approved in the first instance, as your appointed official receiver has to check that you meet the requirements.

Once approved, you are subject to the terms of the DRO for the next 12 months. During this time, creditors cannot chase you for payments, but if you break the terms, then you could have your debt relief order revoked. If this happens, creditors can start chasing you for payments again and you’ll be unable to reapply for another six years.

After 12 months, you’ll be discharged from the debt relief order. However, the DRO stays on your credit file for a further six years, during which time you will struggle to find credit, have loans approved or secure a mortgage.

What Are the Consequences of a Debt Relief Order?

Before applying for a debt relief order, it’s important to consider the consequences. The main reason to apply for a debt relief order is to escape insolvency. For 12 months, your payments are frozen and, after this, many debts are written off. This gives you an opportunity for a fresh financial start after you’ve been discharged.

The negatives can be serious though, primarily because the debt relief order will stay on your record for six years. During this time, it will be difficult to source credit, as lenders will be unwilling to risk loaning you money.

The positives of a debt relief order include:

• Major debts are frozen for 12 months.
• Your creditors can no longer chase you for payments.
• After 12 months, debts are typically written off.
• You’ll have a fresh financial start once you’re discharged.
• A debt relief order is considered to be an effective alternative to bankruptcy.

The major negatives to consider include:

• You can only apply if you owe £30,000 or less.
• You can’t apply for a DRO if you’re a homeowner.
• You have to pay £90 to apply (non-refundable).
• Until discharged, you can’t apply for more than £500 credit without telling the lender about your debt relief order.
• You can’t manage, establish or direct a company until discharged.
• For the first three months, your debt relief order appears publically on the Individual Insolvency Register.
• Remains on your credit score for six years.

Ultimately, a debt relief order is a great option if you have relatively few assets and little disposable income. If this isn’t you, then an insolvency advisor can offer alternative options that could be a much better fit.

Does a Debt Relief Order Wipe Debt?

If you’re considering the benefits of a debt relief order, it’s important to note that not all debts are instantly wiped out.

If a debt is counted as a ‘qualifying debt’ then it will be frozen for 12 months, during which time creditors can’t chase you for payments. When your debt relief order ends, qualifying debts will then be wiped out.

These qualifying debts include:

• Credit card bills
• Overdrafts
• Bank loans
• Payday loans
• Utility bills
• Council tax
• Income tax
• Benefits overpayments
• Rent arrears
• Hire purchase agreements
• Business loans and debts
• Debts you owe to family and friends

There are several debts that aren’t covered by a debt relief order. You would need to continue paying the following debts, which don’t count as qualifying debts:

• Debts acquired fraudulently
• Student loans
• Child maintenance
• Court fines

A debt relief order also doesn’t cover you if you’ve given away assets within the last two years that could have been sold to pay creditors, if you’ve sold assets for far less than their market value, or if you’ve prioritised paying certain creditors over others (such as paying your family instead of paying the bank).

If the majority of your debt doesn’t qualify for any of these reasons, then an alternative insolvency measure could be more appropriate than a debt relief order.

Does a Debt Relief Order Check Your Bank Account?

When you’re applying for a debt relief order, you should be aware that it’s an intrusive process. Because this is a formal legal procedure, the official receiver appointed to oversee your case will be thorough when they’re investigating your finances.

They need to ensure that you fit the requirements for a DRO, and that means they will check your bank accounts. An official receiver will analyse your income and your expenditure, and they may also need to check your payslips and other types of financial evidence.

You may also find that your debts are investigated. The official receiver may check that you haven’t applied for credit using fraudulent or illegal means, and they may investigate any transfer of assets or money you’ve made to family and friends within the last two years.

If they discover any discrepancies in your accounts, then you might find that your application for a DRO is not approved. For this reason, it’s important to be honest when you’re applying for a debt relief order.

What Is the Difference Between a Debt Relief Order and an IVA?

An individual voluntary arrangement (IVA) is another effective type of insolvency procedure that can assist when you’re struggling financially. Both are legally binding agreements, but whereas a DRO is aimed at low-income individuals with no assets, an IVA has less stringent requirements.

An IVA is an agreement between you and your creditors that allows you to renegotiate your debt, lower interest rates and, in some cases, wipe your debt completely. An IVA does not write your debt off, however, because the aim is for you to repay it.

In this respect, an IVA can last much longer than a debt relief order, but it’s suitable for people with a higher income who can afford repayments, and people with assets such as homeowners.

Contact Irwin Insolvency Today for More Information on Debt Relief Orders

If you’re unable to pay your bills as and when they come due, Irwin Insolvency’s expert team is here to help.

Our insolvency advisors have decades of experience helping individuals in financial distress. We can evaluate your personal financial situation, and determine if a debt relief order is the best solution.

Contact Irwin Insolvency today to find out how we can help you.