Debt Relief Orders (DRO) are a relatively new form of insolvency, having been introduced in 2009 (as compared to Individual Voluntary Arrangements, which were introduced in 1986 and bankruptcy which has been around for centuries). They are essentially a very short and relatively painless form of bankruptcy. DROs are only used in England, Wales and Northern Ireland. Scotland has a very similar system known as the Minimal Assets Process. This article will henceforth refer exclusively to DROs. Many of the general principles will also apply to the MAP process in Scotland, however, the practical details may be different.
Qualifying for a DRO
This may seem like putting the cart before the horse, but the rules for DROs are very strict and if you have any ideas about trying to manipulate your financial situation so that you qualify for a DRO, then you need to forget them quickly. Therefore, before you even spend any time considering whether or not a DRO is the right option for you (if you qualify for one there is a good chance it is), it’s probably a good idea to check whether or not you are likely to qualify for one in the first place.
To qualify for a DRO you must:
In short, you must be classed as a resident of the UK outside Scotland. You cannot own a house, nor can you own a vehicle worth more than £1000. In fact, you cannot have assets worth more than £1,000. Your debts must amount to a maximum of £20,000 and you must not be currently participating in bankruptcy or an IVA, nor can you have been the subject of another DRO within the last 6 years. Last but by no means least, you must have a maximum of £50 monthly disposable income.
Some of these points deserve further clarification.
You cannot own a house at all, even if you are in negative equity on your mortgage, you may, however, be permitted to own a vehicle worth more than £1,000 under special circumstances, for example, you have a disability and your vehicle was adapted for it. Be aware that the official receiver will look into your financial records over the last two years and any irregular behaviour could see your application for a DRO being refused. For example, if you gifted away a property or sold it at below market value, then it is highly unlikely that you would be accepted for a DRO.
If you run a business and are currently operating outside of a limited company, then you may wish to take advice about protecting the assets used for your business. The purpose of a DRO is to help you get out of debt, not force you out of self-employment and into employment (if you can find it), but again, the OR will take a negative view of any irregular behaviour.
Some debts are excluded from DROs, student loans are probably the most common examples of this, however, you cannot artificially manipulate your debts to bring them down below the £20,000 mark. If your aim is to pay down your debts legitimately until you reach a point where you may be able to qualify for a DRO, then be aware that you need to treat all your creditors equally. If you pay off one more than another, your application for a DRO may be refused. This could impact your ability to make full use of the snowballing strategy.
Finally, your income is calculated after you have paid all essential bills, but not debt repayments because they will stop if your DRO is accepted. Although the basic idea is simple enough, the calculation may be a challenge for private individuals, but debt-management charities can help here.