The criteria to qualify for a Debt Relief Order “DRO” changes on 29 June 2021. This will mean that around a further 13,000 people per year in England and Wales will be able access the debt solutions.
WHAT IS A DRO?
A Debt Relief Order (DRO) is otherwise known as the “bankruptcy-lite” procedure and is aimed at individuals with little or no assets or surplus income and up to now debts under £30,000.
The criteria for a DRO is due to change on 29th June 2021 and includes:
- Be unable to repay your debts
- Your debts must not exceed £30,000 (an increase from £20,000)
- Your total gross assets must not exceed £2,000 in value (an Increase from £1,000)
- You can own a car worth no more than £2,000 (unless it has been specially adapted and an increase from £1,000)
- Your disposable income must not be more than £75 a month (an increase from £50)
- You cannot have been subject to a DRO in the past 6 years
- You must reside in England, Wales or Northern Ireland (or you have done in the past 3 years, however the rules are not changing in Northern Ireland
- You must not currently be the subject of another formal insolvency arrangement
The cost of a DRO is £90 which is payable to the Official Receiver before your application is processed. You can only apply through a skilled debt advisor known as a “licensed intermediary” such as CAB who can help you draft your DRO paperwork.
You have to make sure that your information is correct at the time you apply. If not your application for a DRO can be rejected or you could have your DRO cancelled or action can be taken against you.
Your application is then vetted by The Official Receiver who can accept, reject or ask for further information. If your DRO is approved, your creditors will be notified. Following approval of your DRO there is a moratorium period of 12 months during which creditors cannot take any action against you. If your circumstances do not change in the 12 month period i.e. your net surplus does not increase above £75, etc your debts are written off after the expiry of the moratorium.
What if you still do not meet the new criteria for a DRO?
There are other solutions available to people struggling with unaffordable debts below is a brief synopsis of other procedures which may be appropriate or you may wish to visit our Debt Solutions page for more information.
Bankruptcy
What is Bankruptcy?
Bankruptcy is one way of dealing with debts you cannot pay. Bankruptcy can provide a fresh start but the rules relating to Bankruptcy are complex and its vital you get advice before you opt for bankruptcy. The bankruptcy proceedings can:
- free you from overwhelming debts so you can make a fresh start, subject to some restrictions, and
- make sure your assets are shared out fairly among your creditors.
Once you are made bankrupt you have a duty to provide information to the official receiver and the trustee, and attend their office as and when required.
Discharge from bankruptcy is usually 12 months after the order but if you fail to co-operate with your Trustee – the automatic discharge can be suspended indefinitely. During bankruptcy you will face a number of restrictions including not being able to act as a director of a limited company and also not being able to obtain credit of more than £500 without disclosing that you are undischarged bankrupt.
Even though the discharge is 12 months, if you have surplus net income, your Trustee will ask for income contributions for 3 years.
The normal term for a bankruptcy is 12 months. During this time you will face a number of restrictions. Any changes in your circumstances must be reported to the official receiver.
If you have a property, any equity in the property which belongs to you will have to be realised during the period of your bankruptcy. The Trustee has a duty to see if any family are available to able to buy your share of equity. If this is not possible, the Trustee, who only has 3 years from the date of bankruptcy to get in your share of equity, will look to secure their interest in the property by obtaining a charge against the property and/or apply to court for a possession order.
Bankruptcy does have a sting in the tail!! If you are found to have racked up debts knowing you could not pay for them, or your debts are the result of gambling or fraud, you could face action to obtain a bankruptcy restriction order “BRO” against you which could last up to 15 years.
All bankruptcies, DRO’s and IVA’s are entered onto a searchable register.
A bankruptcy is often considered a last resort and it is recommended that you first look into other insolvency solutions such as Debt Management or an Individual Voluntary Arrangement (IVA).
Individual Voluntary Arrangement (IVA)
What is an IVA?
An IVA is a legally binding arrangement with your creditors which allows you to repay your debts in affordable monthly payments over a fixed period of time, usually five years. An IVA can only be put forward for you by a licensed Insolvency Practitioner “IP”. The IP has a duty care to ensure they properly advise you on all your options. If you decide an IVA is appropriate, then your IP will become your Nominee and will help you put together your proposals to creditors.
Your proposals need to include all details of your assets and debts plus details of your income and expenditure. IVA’s are generally a payment plan over 5 years. However, an IVA can be tailored to suit your circumstances. So if you have no surplus income and little in the way of assets or equity in your property, it is possible to offer a “full and final settlement” to creditors which could be a 3rd party lump sum to settle your debts.
The proposals are sent to your creditors so they can consider your offer. A meeting of creditors is held (creditors very rarely attend) and creditors get to vote on whether they wish to approve your IVA proposals.
If your assets are at risk because of action taken by creditors, your Nominee we can apply to court for an Interim Order. This means that creditors cannot commence or continue with any action against you and your assets unless the court permits them to do so.
A meeting is then held with your creditors where they are able to vote on whether to accept, alter or reject your proposals – 75% of creditors must agree to the proposal in order for the IVA to go-ahead. As long as your proposal demonstrates a genuine desire to repay as much of your debt as you can afford, it is likely that creditors will accept your IVA. It is your Nominee’s duty to guide you on what creditors will find acceptable.
Once your IVA is approved all interest and charges on your unsecured debt is frozen. If creditors accept that you can only repay a proportion of your debt, the balance of your debt will be written off as long as you keep to the terms of your agreement.
Debt Management Plan (DMP)
What is a DMP?
A Debt Management Plan (DMP) is an informal arrangement between you and your creditors which allows you to repay your debts, normally in full, at a rate that you can afford without relying on further borrowing.
Your affordable monthly payment would be calculated by deducting your reasonable household and living costs from your household income. This payment would then be distributed to creditors on a monthly pro rata basis, after any management fees have been deducted.
Since the FCA took over regulations of DMPs it is evident that creditors’ attitudes towards the plan have hugely improved. We find that creditors generally co-operate really well and will accept the pro rata payment offer whilst also agreeing to freeze interest and charges on each of the accounts.
If during your DMP you are able to offer creditors a lump sum to settle your debts, it is possible to agree discounted settlements.
If you’re not sure which debt solution is right for you, call The Debt Advisor today and speak with one of our advisors on 0800 085 1825. Alternatively you can use our debt calculator tool or request a callback.
