UPDATED - The Debt Relief Order (DRO) rules are changing – Better or Worse for Those in Debt?Posted: Sep 2, 2024

According to Charity Debt Justice, around 6.7 million people in the UK are considered to be in financial difficulties. The Debt Relief Order is one way to deal with this problem and how it works it is about to change.

UPDATE (SEPT 24) Since posting this article there has been a marked increase in the number of DRO applications in the UK.

According to The Insolvency Service:

The number of DROs in June 2024 increased compared to May 2024, which had already set a record high in the monthly time series going back to their introduction in 2009.

It would seem that the removal of the initial charge has encouraged more people with debt issues to come forward and try to resolve things.

Debt Relief Orders DRO, Who Are They For?

People get into financial problems for all kinds of reasons. As a result, they can find themselves with a restricted income and a lot of financial obligations they can no longer meet. As we mentioned at the start of this article, the number of people in this situation is frankly staggering. The impact of inflation, the cost of living, and other factors has also contributed to the problem of personal debt. There is a point however where skipping a few payments here and there becomes a more permanent issue. Essentially, the purpose of a DRO is to provide a solution for people with relatively low levels of debt, minimal assets, and very little disposable income, who find themselves unable to meet their financial obligations.

Is a Debt Relief Order another form of Individual Voluntary Arrangement?

I sometimes see some confusion here because both the DRO and Individual Voluntary Arrangement (IVA) are designed to address the problem of resolving personal debt. However, they are not the same and the outcome, costs and criteria are very different.

An Individual Voluntary Arrangement (IVA) is a legally binding agreement between a debtor and their creditors to repay debts over a specified period, typically five years. IVAs are designed for individuals with significant debts who have a steady income and can commit to regular payments.

A DRO is only available to people who have relatively low levels of debt (see the paragraph below on the coming changes for the specifics). The applicant will also need to demonstrate, minimal assets and limited disposable income.

While both are potential alternatives to bankruptcy, the DRO is more aimed at someone in a position where they do not have the wherewithal to set up repayments with their creditors. Usually this is because they simply do not have the financial stability to do so.

Bankruptcy is therefore probably not a viable option for someone on a DRO because of the cost of the process, and the lack of assets, regular income, or available funds. An IVA, on the other hand, tends to avoid bankruptcy and with that some of the restrictions that it may bring. A good example is that with an IVA you can continue to be a director of a limited company, whereas in bankruptcy and a DRO this is no longer possible. However, is also usually considerably more expensive than a DRO, and requires assets and disposable income levels that are much higher than those needed to meet the DRO criteria.

What does a DRO mean in practical terms.

Once a DRO is agreed it will have several advantages for the applicant. Certainly, it will ease the pressure to find money you don’t have, in order to pay creditors. That doesn't mean this is an easy ‘get out of financial problems free’ card though. DRO regulations are very strict and once in place, they must be followed to the letter. A DRO will mean that:

• Debts are Frozen: Once approved, the DRO freezes the individual’s debts for a period of 12 months. During this time, creditors cannot take any action to recover the debts.
• Interest and Charges are Also Frozen: Any interest and charges on the debts included in the DRO are also frozen and cannot change, preventing the total amount owed from increasing.
• No Creditor Action: Creditors included in the DRO cannot pursue legal action against you to recover the money owed.
• Debts Are Discharged: At the end of 12 months the debts listed in your DRO are discharged so you no longer need to pay them.
• There is Legal Protection: The DRO provides legal protection from creditors, the intention here is to offer peace of mind and allow you to focus on improving your financial situation.

Let’s be clear about something. A DRO is not to be taken lightly and it should only be considered where there is no better solution available. It needs careful consideration because it will almost certainly have a significant impact on your financial well-being for an extended period.

So, while there are some benefits to the DRO in relation to your debts, there will be significant disadvantages. These include:

• During the DRO period, the debtor is restricted from obtaining credit over £500 without informing the lender about the DRO
• You will be forbidden from acting as a company director without court permission. If you are running a business you may need to tell your customers that you have DRO (take advice on this if you think it may apply)
• Some debts cannot be included in a DRO, such as student loans, court fines, and child maintenance arrears. These must still be repaid by the debtor

The effect on the applicant’s credit options can be the biggest factor in choosing another route. Once you enter into a DRO you are unlikely to obtain credit or will pay a significantly higher interest rate if you do find someone willing to offer it. That could affect any major purchases even if your income improves after the DRO is ended. Mortgages, car loans, credit cards and so forth, will be considerably harder to obtain. It may also impact your ability to rent a property as letting agents and landlords will usually do a credit check. A DRO will show up on these checks.

What Changes Will be Introduced on June 28th 2024?

There is a substantial change in some of the criteria you must hit when you are applying for a DRO.

• Increased Debt Threshold: The maximum debt limit for eligibility will increase from £30,000 to £50,000.  This is about acknowledging the recent rising levels of personal debt.
• Higher Asset Limit for a vehicle. The DRO allows for a single vehicle to be removed from the total assets value of the applicant.  The value of the vehicle will rise from £2,000 to £4,000. 
• Disposable Income Cap: The cap on disposable income will be £75 per month.
• The £90 fee required when applying for a DRO has already been scrapped and suitable applicants will no longer need to pay it.

Overall, these are welcome changes for anyone with lower levels of debt and limited assets and income. The DRO will now be cheaper, apply to the real world situation of many people, and allow for the recent rises in the cost of living. The new levels, such as the increase in the asset value of a car, seem to more accurately reflect changes in the general personal finance situation for a great many people.

While a DRO is certainly not the right solution for everyone it does potentially offer a debt lifeline to many. Applicants should remember that it will seriously affect your financial situation for 6 years. Having a DRO is not a desirable position to be in, but it could be the last, best, option for many people who, unfortunately, find themselves in severe financial hardship.