Managing debt can feel overwhelming, but if your financial situation has reached a breaking point, a Debt Relief Order (DRO) might be a lifeline worth considering.

A DRO is a type of debt solution specifically aimed at those with low income and minimal assets, offering temporary relief from financial pressure and potentially writing off debts after a year.

This guide will walk you through what a DRO is, how it works, when it could be the right choice, and what alternatives you should consider.
By understanding your options, you can make more informed financial decisions.

What is a Debt Relief Order (DRO)?

A Debt Relief Order (DRO) is a debt solution available in England, Wales, and Northern Ireland. It provides relief to individuals who are struggling to repay unsecured debts, such as credit cards or utility bills, due to low income and limited assets. With a DRO, your qualifying debts are put on hold for 12 months, meaning creditors can’t chase you for payments during this period. If your financial situation hasn’t improved after this time, the debts included in the DRO may be written off entirely.

Eligibility Criteria for a DRO:

• Your debts must not exceed £30,000.
• You must have less than £75 disposable income per month.
• Your assets should be worth less than £2,000 in total.
• You must not own a vehicle worth more than £2,000.
• You must be a resident of England, Wales, or Northern Ireland (DROs are not available in Scotland).

This type of debt relief is designed for those with no realistic way of paying off their debts. However, it’s important to consider all your options and seek professional advice before applying.

 

How a Debt Relief Order Works

Once a Debt Relief Order is approved, your unsecured debts are placed under a “moratorium period” of 12 months. During this time, creditors cannot take legal action or request payments from you. The goal is to give you breathing space to recover financially.

Here’s what happens during this period:

• No Payments Required: You won’t have to make payments towards the debts listed in your DRO.
• Frozen Interest and Charges: Any interest or additional charges on your debts are stopped.
• Restrictions on Assets and Income: You must keep your assets and income within the DRO’s set limits throughout the year.

If your circumstances remain unchanged after the moratorium, your debts are written off. However, if your financial situation improves significantly, the DRO could be revoked.

Important Note: Not all debts can be included in a DRO, for example:

• Court fines
• Child maintenance or child support payments
• Student loans
• Debts incurred from fraud
• Social Fund loans
• Compensation payments ordered by a court
• TV licence arrears
• Some types of housing benefit overpayments
• Damages or personal injury claims awarded by a court

These debts must still be repaid even if your DRO is approved. Always review your specific obligations and seek professional guidance to understand which debts can be included.

When to Consider a DRO

A Debt Relief Order can be a suitable option if your financial circumstances meet certain conditions. Here are situations where a DRO might be worth exploring:

• Low Income and Few Assets: If you don’t have disposable income and your total assets are minimal, a DRO could be your best debt relief option.
• Unmanageable Debt: When your unsecured debts (like credit cards or personal loans) are too high to realistically repay.
• Limited or No Savings: If you lack financial resources to settle your debts in a lump sum or over time.

Benefits of a DRO:

• Stops creditor harassment
• Freezes interest and charges on debts
• May lead to full debt write-off after 12 months

When to Think Twice:

• If you expect your financial situation to improve soon
• If you have debts that cannot be included in a DRO

Always speak to a debt advisor to ensure a DRO is the most suitable solution for your situation.

Issues and Potential Pitfalls

While a Debt Relief Order can provide significant relief, it’s essential to be aware of the drawbacks and limitations:

• Impact on Your Credit Rating: A DRO will remain on your credit file for six years, severely affecting your ability to borrow or get financial services.
• Restrictions During the Moratorium: You’ll face strict rules, like not being able to apply for credit over £500 without notifying the lender.
• Limited Future Financial Options: Renting a property or getting a mortgage may be more difficult, and some jobs could be affected.
• Risk of Revocation: If your financial situation improves, such as an inheritance or a significant income rise, your DRO could be cancelled.

Example Complications: If your income increases during the 12 months, you may be required to restart debt payments, and debts not covered by the DRO will still need to be paid.

Understanding these pitfalls will help you weigh whether a DRO is the best fit for your financial circumstances.

Alternatives to a DRO

Before committing to a Debt Relief Order, consider these alternative debt solutions, each with its own pros and cons:

1. Debt Management Plan (DMP)
   • Informal agreement with creditors to pay back debts at a reduced rate
   • Flexible but doesn’t stop interest or charges
2. Individual Voluntary Arrangement (IVA)
   • Legally binding agreement to pay off debts over time
   • Stops creditor harassment but can affect assets
   • Read more in our article IVAs Explained
3. Bankruptcy
   • Suitable for those with high debts and limited options
   • Severe impact on credit and can involve asset loss
   • Find out if it is for you with our report UK Bankruptcy: Myths, Facts and You
4. Debt Consolidation Loan
   • Combines multiple debts into one, possibly at a lower interest rate
   • Not ideal if you have a poor credit score
   • Debt Consolidation Loans

Exploring these alternatives may provide a more suitable path, depending on your financial situation.

 

Credit Counselling is a valuable service that can help you navigate debt management and explore your options. A qualified credit counsellor will assess your financial situation, provide tailored advice, and may negotiate with your creditors to reduce interest rates or arrange more manageable repayment plans.

The counselling sessions are usually free and can clarify whether solutions like a Debt Management Plan (DMP) or a Debt Relief Order (DRO) are right for you.

This professional guidance is especially helpful if you feel overwhelmed or unsure of where to start.

To learn more about Credit Counselling, read our special report Credit Counselling: How It Can Help You Manage Debt

How to Apply for a Debt Relief Order

Applying for a DRO isn’t something you can do on your own; you’ll need an authorised debt adviser to help. These advisers work through organisations like Citizens Advice or StepChange and will guide you through the process.

Applying for a DRO is a structured process. Here’s how it typically unfolds:

Step 1: Consult a Debt Adviser (1–2 Weeks)
Start by contacting an authorised debt adviser from organisations like Citizens Advice or StepChange. They’ll assess your financial situation, review your eligibility, and advise if a DRO is the right solution for you.

Step 2: Preparing Your Application (1–3 Weeks)
You’ll need to provide detailed information about your debts, income, expenses, savings and assets. A list of all debts and creditors. Documents such as bank statements, bills, and proof of income may be required. Your adviser will complete the DRO application on your behalf.

Step 3: Paying the Fee and Submitting (1 Week)
A one-off fee of £90 is required. Once paid, your adviser will submit the application to the Insolvency Service.

Step 4: Approval and Start of the DRO (Up to 10 Days)
The Insolvency Service reviews your application. If approved, your DRO is put into effect, and creditors are notified. The 12-month moratorium period begins, during which debts are frozen and creditors can’t pursue you.

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This timeline can vary based on how quickly you gather the necessary documents and the response time from your adviser.

Here’s a list of questions you might want to ask during the DRO application process:

• Is a DRO the best option for my financial situation, or are there better alternatives?
• What debts will be included in the DRO, and which ones won’t?
• How will a DRO affect my credit score and ability to borrow in the future?
• What restrictions will I face during the moratorium period?
• What happens if my financial situation improves before the DRO ends?
• Are there any risks of my DRO being revoked?
• Can you help me budget or offer further financial advice post-DRO?

These questions will help ensure you fully understand the impact and requirements of a Debt Relief Order.

Life After a DRO: Rebuilding Credit and Managing Finances

Once your Debt Relief Order has ended, you may feel a sense of relief, but it’s important to work on rebuilding your financial health. Here’s how to get started:

1. Rebuilding Your Credit

• Check Your Credit Report: Ensure all debts included in the DRO are correctly marked as settled. For more detail on reading your report, check out Understanding Your Credit Score
• Use a Credit-Building Card: Consider using a credit-builder card responsibly and always pay off the full balance to avoid interest.
• Register on the Electoral Roll: This can improve your credit score.

2. Managing Finances Post-DRO

• Budget Wisely: Create a realistic budget that prioritises savings and essential expenses. For more see our report UK Budgeting Tips
• Build an Emergency Fund: Aim to set aside a small amount regularly to handle unexpected costs. Read more: The Importance of an Emergency Fund
• Use Direct Debits: Automate bills and savings to stay on top of financial commitments.

Getting Financial Advice: It’s helpful to continue seeking support from financial advisers or using budgeting tools. This will help prevent slipping back into debt and promote long-term financial stability.

Where to Find Authorised Debt Advisers in the UK

Seeking professional advice from a regulated debt adviser is crucial when considering a Debt Relief Order.

To verify if a debt adviser is authorized and regulated by the Financial Conduct Authority (FCA), you can follow use the Financial Services Register:
The FCA maintains a public record called the Financial Services Register (FS Register) that lists all firms, individuals, and other bodies authorized by the FCA or the Prudential Regulation Authority (PRA).

Ensure that the contact details listed on the FS Register match those provided by the debt adviser.

If there are discrepancies or no contact details are listed, contact the FCA directly at 0800 111 6768

For an in depth look read our special report Top Tips to Find a Trustworthy Financial Adviser

Here are some trusted organisations that offer free and impartial help:

1. StepChange Debt Charity
   StepChange is one of the UK’s leading debt charities. Contact them online or by phone:
   • Website: StepChange.org
   • Phone: 0800 138 1111
2. Citizens Advice
   Citizens Advice provides comprehensive support on debt and other financial matters. You can visit local offices or reach them online:
   • Website: CitizensAdvice.org.uk
   • Use their online locator to find your local branch.
3. National Debtline
   National Debtline offers free advice over the phone and online:
   • Website: NationalDebtline.org
   • Phone: 0808 808 4000
4. MoneyHelper (formerly Money Advice Service)
   MoneyHelper provides a debt advice locator tool to find support services in your area:
   • Website: MoneyHelper.org.uk
5. PayPlan
   Although not a charity, PayPlan offers free debt advice and management plans:
   • Website: PayPlan.com
   • Phone: 0800 280 2816
6. Christians Against Poverty (CAP)
   CAP provides debt help through local church centres:
   • Website: CAPUK.org

Important Note: Ensure the organisation is authorised by the Financial Conduct Authority (FCA). This should be clearly displayed on their website. Also, remember that reputable debt advice services are typically free—be wary of any company charging fees for basic debt advice.

 

Frequently Asked Questions

1. What’s the difference between a DRO and bankruptcy?
A DRO is often cheaper and less severe than bankruptcy, making it suitable for people with fewer assets and lower debts. Bankruptcy may be needed if your debts exceed the DRO limit.

2. How does a DRO affect my ability to rent or get a mortgage?
A DRO will negatively impact your credit score, potentially making it harder to secure a mortgage or rental property.

3. Can I include all my debts in a DRO?
No, some debts like student loans and court fines cannot be included.

4. Will my employer find out about my DRO?
Usually, your employer won’t be informed unless it’s a requirement of your job, such as working in financial services.

5. Can I apply for credit during the DRO period?
You’re restricted from applying for more than £500 in credit without notifying the lender about your DRO.

6. Does a DRO cover utility debts?
Yes, arrears on utility bills like gas and electricity can be included in a DRO.

7. How long does a DRO stay on my credit record?
A DRO will stay on your credit file for six years from the date it’s approved.

Summing Up

Deciding whether a Debt Relief Order is right for you involves weighing the benefits of debt relief against the long-term impact on your credit score and financial options. While a DRO can provide a fresh start for those with low income and minimal assets, it’s not a one-size-fits-all solution.

Take time to consider alternatives and seek advice from a qualified debt adviser to ensure you’re making the best choice for your situation. Remember, getting the right support can make navigating your financial challenges far less daunting.