Debt Relief Orders
By Catia Rodrigues, Legal Assistant at Woodstock Legal Services
When recovering debt, the process can take many different turns. The process depends on the debtor’s circumstances, so it can vary as there are different options from which to get the monies from, such a High Court Enforcement where bailiffs can seize assets and goods belonging to the debtor and an Attachment of Earnings Order where a percentage of the debtors wage is directly deducted from their salary. However, if debtors are unable to pay, even when Enforcement has been instructed, there are many solutions available to debtors such bankruptcy or IVA.
A Debt Relief Order (DRO) is another option that is available to debtors who are unable to pay their debt. They have to meet the following criteria in order to apply for a DRO:
- they owe £30,000 or less
- they have less than £75 to spend each month, after paying tax, national insurance and normal household expenses
- they have lived or worked in England or Wales in the last 3 years
- their assets aren’t worth more than £2,000 in total
- they’ve not had a DRO in the last 6 years
A DRO is only available in England, Wales and Northern Ireland and means the debtor doesn’t have to pay the debt for a certain period of time (usually 12 months), it freezes all the debt repayments and at the end of the DRO period, the debts included in it will be written off (discharged) and they won’t have to pay them if the debtor’s financial situation hasn’t improved. Unsecured debts of £5,000 – £30,000 can be written off and are regulated by an approved insolvency practitioner.
There are advantages and disadvantages for a debtor choosing a DRO. One of the advantages is that their creditors cannot pursue the debt during the period of the DRO and if the debtor meets the asset eligibility limitation, they can keep some of their assets including their car.
However, this option comes with risks and limitations, for example homeowners cannot apply for a DRO, the debtor cannot operate a company under a different name without first disclosing the DRO and their bank account may be frozen and it will have an impact on their credit rating for 6 years, similar to bankruptcy, and it will appear on their credit report.
For the reasons above, the majority of debtors do not qualify for a DRO and as a result we do not encounter many of these through out our debt recovery process, however, the number of people taking out a DRO has risen by 61% according to the Insolvency Service.
When debtors are unaware of the implications of their insolvency options
Many tenants who fall into debt to do not understand the eligibility criteria and long-term consequences of insolvency solutions like DROs.
On behalf of their client, a landlord, Woodstock dealt with one debtor in particular who informed them that she did not want to be committed to repaying her debt for rent arrears, which amounted to £8,579.13, for a considerable period of time. She looked online for a way out of her debt and came across Debt Relief Orders. She was under the assumption that by entering into a DRO she would not have to pay back the debt and it would be written off. She was unaware that, as she was now a homeowner, she did not qualify to apply for a DRO and that it would seriously impact her credit rating for future lending facilities such as re-mortgaging, which she intended to do.
After Woodstock explained this to the tenant, she chose to make a re-payments offer instead which was accepted by the landlord, and the debt was paid off in a reasonable amount of time. Had Woodstock not spent time probing the debtor, there may have been a negative outcome for both the client and the debtor who was unaware of the extent to which the DRO would potentially impact her finances in the future.
Often when dealing with debtors they are frustrated which impedes their ability to reason and make rational decisions but with the right skills and time invested in finding out about the circumstances, the desired result can be achieved not only for the landlord but the debtor too.