The number of people seeking Debt Relief Orders has reached its highest level since 2009, but is it the right debt management solution for you? Read on for our quick guide.
With the cost-of-living crisis continuing to impact the UK, more people than ever before are seeking support with managing their debts. In fact, data from the Insolvency Service found that 8,438 people in England and Wales took out a Debt Relief Order (DRO) between July and September 2023. This is a 49% increase on the same quarter in 2022 and the highest number since DROs were first introduced in 2009.
But what is a debt relief order and why are they becoming a more popular debt management solution?
What is a debt relief order?
A debt relief order (DRO) is a formal way to deal with your debts. It’s typically an option for people who have substantial debts and a limited amount of disposable income available to pay them.
To qualify for a DRO, you must:
- Owe £30,000 or less
- Not be a homeowner
- Not have any savings or assets worth more than £2,000
- Have no more than £75 left over each month once your essential bills are covered
- Not be already pursuing bankruptcy or an Individual Voluntary Arrangement (IVA)
- Have lived in England or Wales for the last three years
To apply, you’ll need to work with a specialist DRO adviser. There is also a fixed fee of £90.
If you meet all the above criteria, and your application is accepted, your DRO will typically last for a year unless your financial situation improves before then. You won’t be expected to make payments towards the debts covered in the DRO during this time and your creditors shouldn’t take further action against you.
Once the DRO comes to an end, your debts will likely be written off.
Why has there been an increase in the number of people taking out debt relief orders?
As a formal debt solution with rigorous terms and conditions, it might be surprising to learn that the number of people opting for a debt relief orders has reached a record high. However, there are a few different factors that might be influencing this shift.
The cost-of-living crisis continues to put a strain on household finances across the UK. Escalating prices for everyday essentials like food, fuel, electricity, and gas mean that our salaries don’t go as far as they did a few years ago and there is less money left over each month to put towards our debts. These pressures may also lead more people to fall behind with their priority debts for the first time.
Similarly, the UK economy has also impacted people’s personal financial situations. Rising interest rates have forced many businesses to pass on these costs to their customers and led others to make redundancies to reduce their workforce. This economic instability may have led to more people struggling to keep up with their debts and applying for a DRO to help.
Is a debt relief order right for me?
If you’re considering a debt relief order, it’s important to weigh up the pros and cons and think about how your current and future life could be impacted. If you don’t have the money available to pay your debts, don’t have any assets to sell, and are facing further action from your creditors, a debt relief order could be a good option for you and provide an almost clean slate.
However, a debt relief order is a formal agreement and can affect your everyday life more than you might think. It will also lead to your details being included on the public Insolvency Service’s Individual Insolvency Register.
Not all types of debt can be included in a debt relief order. While credit card debt, rent arrears, hire purchase finance, and buy now, pay later loans can all be included, the types of debt that don’t qualify include:
- Magistrates’ court fines
- Child support
- Student loans
- Social fund loans
- Compensation for death and injury
If you have several different types of debt, such as a personal loan and Council Tax arrears as well as a student loan, the ineligible debt won’t count towards the £30,000 limit.
It’s also worth keeping in mind that a DRO will affect your credit score and can stay on your report for up to six years limiting your ability to get a new loan or type of finance. You also can’t borrow £500 or more during your DRO without notifying the creditor.
That’s not all; if you’re involved in a business, you’ll need to let your partners know that you have a DRO and you won’t be allowed to promote, manage, or set up a limited company (or be a company director) without getting the court’s permission.
Securing a DRO could also:
- Require you to give back any goods you own under a hire purchase agreement
- Affect your tenancy agreement
- Lead your bank to close your account
- Affect an application for British citizenship
- End any power of attorney you might have over another person
What are the alternatives to a debt relief order?
A debt relief order isn’t the right debt management solution for everyone. The good news is that there are several alternative options to consider. If you’re not sure where to start, you could seek help our friendly team can explain the different debt management solutions available so that you can make the right choice for you and your circumstances.
If you would prefer an informal solution, a debt management plan can help you reach an agreement with your creditors that allows you to pay your debts at a reduced rate. However, if you’d rather pursue a formal option, authorised by the courts, an Individual Voluntary Arrangement might be right for you. In some cases, if your financial situation is severe, bankruptcy might be the best solution. There’s no one-size-fits-all and your debt adviser can help you make the decision that’s right for your individual circumstance.
Considering a DRO? Our team of experts is here to help. Give us a call on 0161 8260 585 or send a message here
