Debts can easily begin to mount up. Whether it’s an unexpected life event, a change in your personal circumstances, redundancy or a growing family, it can be easy to reach for credit to solve an immediate problem. Before you know it, you’re borrowing money to pay off old debts, and the amount of money you owe begins to spiral.
Credit can be invaluable. It can help us achieve our goals, spread the cost of large purchases and get our budget back on track. Used sensibly, it can make a huge difference in someone’s life. If it’s not used correctly, however, problems can occur. Sometimes problems with credit can become so overwhelming the only solution is to take radical action.
What Happens When Debts Get Out of Control?
Most people have heard of bankruptcy. It’s a radical solution to large scale and unmanageable debts that are often instigated by a creditor who is owed more than £5,000. You can also choose to file for bankruptcy yourself if your debts are overwhelming and you have no means to pay them back.
What Exactly Is Bankruptcy?
Bankruptcy is a type of insolvency that writes off nearly all your debts. It can give you a fresh start if you’re struggling to pay back any money that you owe. It’s a legal process with serious consequences that should only be entered into voluntarily if you have little real chance of paying back your debts in a reasonable amount of time. Substantial assets such as your home and car can be included in your bankruptcy order. It can prevent you from entering certain occupations and even endanger current employment in areas such as finance and the law. It will have a hugely negative impact on your credit report for at least six years. The details of your bankruptcy will be recorded on a public register.
Are There Any Alternatives?
Until fairly recently, people who found themselves in dire financial straits had little choice but to voluntarily apply for bankruptcy to clear their debts. They did this because their problem was so large the negative consequences were outweighed by the chance for a new start.
It wasn’t a perfect solution for everyone who was heavily indebted, which led to calls for an easier to access alternative to be introduced. In 2009 this was recognised with the introduction of Debt Relief Orders (DRO) in England and Wales.
What Is a Debt Relief Order?
A debt relief order is a form of insolvency that is a cheaper, simpler and quicker alternative to bankruptcy. It’s particularly suitable for people with few assets.
A DRO can be a way to deal with your debts if you;
* Owe £20,000 or less
* Are not a homeowner
* Don’t own other large or valuable assets
* Have very little spare income
When you have entered into a Debt Relief Order, you don’t have to make payments towards most of your debts, and your creditors are unable to force you to repay your debts. A DRO will usually last a year, and at the end of the DRO, you will no longer be liable for the majority of your debts.
Who Is Eligible for a Debt Relief Order?
Debt relief orders are primarily for people on lower incomes, with lower debts and fewer assets who find themselves unable to pay their debts. They offer a means to wipe the slate clean and begin again without the negative consequences of bankruptcy.
To be eligible for a debt relief order, you should meet the following criteria.
* You should have lived, owned a property or run a business in England or Wales during the last 3 years.
* You should be unable to pay back your debts.
* Your total unsecured liabilities should be £20,000 or less.
* Your gross assets should not exceed more than £1000. This does not exclude a house or any other property, so homeowners would not be eligible. The only exception to this is a car worth less than £1000 or a more valuable car that has been adapted to take account of a physical impairment that would otherwise impact your ability to live your life.
* You should have less than £50 a month left at the end of each month after you’ve paid your basic household expenses.
* It should have been at least 6 years since your last DRO was made.
* You should not be involved in any other formal insolvency procedure. This includes an undischarged bankruptcy, an individual voluntary agreement, current bankruptcy restrictions order or undertaking, an interim order, or a pending debtors bankruptcy petition in relation to the debtor, but the court has not referred them to the DRO procedure as a more suitable means of debt relief.
* The debtor has a current bankruptcy petition filed against them, and the creditor has not permitted them to enter a DRO.
Recent Financial Activity
There are some historical financial transactions that you will need to inform your DRO adviser about. If you’ve given away assets, sold assets for less than their actual value, or if you’ve prioritised repaying one creditor rather than another. This is to ensure that you haven’t been passing off assets to your relatives or paying back debts owed to family members or close friends while ignoring other debts.
What Debts Are Covered by a DRO?
Any debt that goes into a Debt Relief Order is known as a ‘qualifying debt’. During the period of the DRO, any creditors cannot demand any payments. If they insist on asking for payments, the debtor does not have to pay them.
The type of debts that are typically included in a DRO includes;
* Credit cards
* Telephone and mobile bills
* Rental arrears
* Utility bills, telephone bills, council tax and income tax
* Benefit overpayments
* Conditional sales agreements and hire purchase agreements
* Store credit agreements
* Bills owed to professionals such as vets and solicitors
* Loans from family and friends
* Business incurred debts
If any of these were obtained illegally, you would still be responsible for paying them back when the DRO comes to an end.
Even though rent arrears are included in your DRO, your landlord may still start action to end your tenancy if you are behind on your payments. If you’re in this position, a DRO allows you to concentrate on paying your rent and keeping a roof over your head without competing debt demands.
What Debts Are Not Included in a DRO?
There are some debts that a Debt Relief Order does not cover. These include;
* Magistrates court fines
* Criminal activity confiscation orders
* Social fund loans
* Student loans
* Compensation payable due to injury or death
* Child support and maintenance
If you have any of these debts, they won’t be counted towards your £20,000 maximum debt limit.
A DRO adviser will give your advice about your individual circumstances. However, any debts that you forget to include in your DRO cannot be added at a later date, so it’s important to be as upfront and thorough as possible about your debts.
What Are the Consequences of Entering Into a DRO?
Debt is serious, and there’s no insolvency measure that is without consequences for the individual. That’s why it’s important to consider your particular situation and any potential solution fully.
When you enter into a DRO, certain restrictions will be placed on your finances for 12 months after your DRO begins;
* Your bank account could be frozen
* The DRO will be recorded on your credit report.
* It will be recorded on the Individual Insolvency Register for the 12 months of your DRO, plus 3 extra months, meaning 15 months in total.
* If your employment contract states that you shouldn’t have a DRO, it could affect your ongoing employment status. Such an exclusion is rare but can be applied in fields such as finance or the law.
* Some tenancy agreements state that a tenant cannot have a DRO. If this is the case, your tenancy could come to an end. Landlords sometimes insist on this clause to minimise the possibility of not being paid rent arrears. If you find yourself in this position, it’s important to talk to the landlord as soon as possible.
Some of the principal restrictions that will be placed on you when you enter into a DRO are;
* You can’t take out credit for more than £500 without telling the lender that you are subject to a DRO.
* You can’t run a business under a different name without telling everyone with whom you have business dealings the name of a previous business subject to the DRO.
* You cannot be involved with creating a limited company or becoming a company director without first gaining permission from the court.
* You can’t apply for another DRO within six years. This means that you may be forced towards bankruptcy if you find yourself in severe financial difficulties again.
It’s Important to Be Honest
If the official receiver discovers that you haven’t been completely honest about your finances before or during the lifetime of your DRO, then they will propose that you accept a ‘debt relief restrictions undertaking’. If you refuse to agree to this, they can then apply to the court for a ‘debt relief restrictions order’. This means that longer-term restrictions might be placed on you after the date your DRO comes to an end. This can be anything from 2 to 15 years. Your details will also be kept on the Individual Insolvency Register for the length of the new order, plus an additional 3 months.
What Happens to Your Bank Account During a DRO?
When you enter into a DRO, any bank accounts you hold will not automatically be closed. Instead, your bank will decide to close or keep your account open. If you have a debt with your bank, they will likely choose to close your account as soon as your DRO begins. Even if you don’t have debts with your bank, they may still choose to close your account or remove certain features from it, such as an overdraft facility.
You can still apply for new accounts, but you must inform the bank about your DRO. One solution is to open a Basic Bank Account, which offers limited free banking facilities.
How a DRO Will Impact on Your Credit Rating
Credit agencies will keep the details of your DRO on file for at least 6 years. It could affect your ability to get a mortgage or other credit during that time.
How to Get a Debt Relief Order.
Getting a DRO has to be done through a DRO adviser. You can find one at your local Citizens Advice Bureau. A DRO adviser will look at your finances, discuss your options and help you decide if a DRO is the best way forward for you. If you decide to go ahead, they will help you fill in your application and will forward it to an official receiver at the Insolvency Service. The official receiver will decide whether or not to go ahead with a DRO.
It costs £90 to apply for a DRO, and this fee is non-refundable even if your application is rejected, so it’s important to get your application right. This fee has to be paid in cash at a Post Office or Payzone outlet. Some charities and trusts offer financial help towards your DRO fee, and your adviser will be able to tell you if you’re eligible.
The receiver will make a decision based on your application. They will either approve the DRO, ask for more information pending their decision, or refuse the order if there are errors on your application or they believe you have been dishonest. If your application is refused, the receiver will provide you with the reason why in writing.
After your DRO begins, you have to continue to communicate with the official receiver. If your income increases or your receive a lump sum such as an inheritance or a tax rebate, you will need to inform the receiver. Failure to do so could result in prosecution.
You can learn more about Debt Relief Orders at StepChange, the debt-relief charity.