What is a DRO? Debt Relief Orders explained

A Debt Relief Order (DRO) is a debt management solution that eliminates certain debts after a year. DROs protect you from creditors and allow you to get your finances back under control. However, Debt Relief Orders have strict eligibility requirements and significant long-term consequences, including a lengthy impact on your credit report.

Here, we’ll explore everything you need to know about DROs, including what they cover, their eligibility requirements, their advantages and drawbacks, and how to get one. If you’re ready to find out if a DRO is right for you, keep reading.

What debts does a DRO cover?

First, let’s get clear about what Debt Relief Orders do and don’t cover. Debt Relief Orders cover most personal debts like the following:

• Forms of credit like personal loans, credit cards, and overdrafts
• Taxes like income tax and council tax
• Buy now, pay later (BNPL) arrangements
• Rent and utility arrears

However, DROs don’t cover everything. You’ll still be responsible for things like:

• Child maintenance
• Secured loans
• Student loans

If you’re income-constrained, your student loan payments will be very low or non-existent. To learn more about how you repay your student loans, check out our detailed guide.

Am I eligible for a DRO?

DROs have specific eligibility requirements to ensure that they can successfully help those who need debt relief. The main eligibility requirements include the following:

• Maximum level of debt: You can’t have more than £30,000 worth of debt in total. As of June 2024, this will increase to £50,000
• Maximum level of assets: You can’t have more than £2,000 in valuables or assets.
• Car value: If you own a car, it must have a value of less than £2,000, or less than £4,000 as of June 2024.
• Residency: You must have lived or worked in England or Wales in the last three years.
• Home ownership: If you own your home, you’re not eligible for a DRO.
• Limits on other debt arrangements: You can’t have active enrollment in other debt relief programs like an IVA, or be bankrupt, or have had a DRO within the last six years.
• Limited cash: Your earnings must be so limited that you have no more than £75 available to make payments on your debts after accounting for your cost of living.

While these are the primary criteria, it’s important to know that debt advisors will look for other factors that can influence your eligibility.

For example, if you have a debt to a family member or friend and have shown preference by prioritising the debt to them over a credit card company, you may not be eligible for a DRO. Or, if you’ve sold items below their value in the past two years you may be ineligible, as you could have paid more of your debt off if you had sold the item for its true value.

How to get a Debt Relief Order

The DRO application process is a piece of cake, plus there’s no fee involved. Here’s what you need to do:

1. Check if you meet the eligibility requirements for a DRO. If you can’t be sure, move on to step two anyway.
2. Get in touch with a debt advisor. They’ll be able to help you be sure if a DRO is right for you. Debt advisors are approved by the UK government and will verify your eligibility, including determining your monthly expenses.
3. Answer your debt advisor’s questions so they can determine how much debt you have, what payments you’ve made, and how much your assets are worth.
4. If your debt advisor finds that you’re eligible, they’ll complete your application for you.
5. Your application will be approved or rejected within two weeks. After this, wait for the additional terms you’ll need to follow during the 12-month DRO period.

Advantages and drawbacks to Debt Relief Orders

Personal debt solutions like DROs can be enticing because they offer freedom, but they’re not without risks. If you want to make the best decision for your unique situation, it’s crucial to understand the risks as well as the benefits.

Advantages of DROs

• Debts written off: The biggest benefit of a DRO is that your debts are completely written off after 12 months.
• Simple application process: The application for a Debt Relief Order is simple, as most of it is handled by a debt advisor. Plus, there’s no fee for applying, so you have nothing to lose by applying.
• Creditors must stop contacting you if you’re approved: During and after your DRO period, your creditors need to stop contacting you for payments. They can send you general correspondence — like promotional materials or other important information — but they can’t keep badgering you for payments.

Drawbacks to DROs

• Huge impact on your credit score and file: The odds are that if you’re applying for a Debt Relief Order, your credit score is already in rough shape. However, a DRO can make it hard to improve your score long-term, as it’s visible on your credit report for six years.
  
  This means that even if you’ve financially recovered in three years, you’ll likely have a difficult time obtaining credit until the six years pass. This is because the DRO is visible to lenders and banks, who will see it as a risk and most likely avoid lending to you.
  
  
• Strict requirements during the DRO period: During the 12-month DRO period, your circumstances need to remain relatively unchanged. For example, if you get a significant pay increase or inherit valuable assets, it may change your eligibility for your DRO.
  
  
• Is public: Your DRO will be listed in the Individual Insolvency Register. This is a public record that anyone, including potential employers, can search. If you’re looking for a job, your name showing up in the insolvency register could damage your ability to get hired.
  
  

Alternatives to Debt Relief Orders

Debt Relief Orders can be helpful in the right circumstances, but not everyone qualifies for them. As you consider how to deal with you debts, consider looking into the following options:

• Debt Management Plans (DMPs) are informal, aren’t legally binding, and they don’t write off your debt like a DRO. However, DMPs do typically make your payments more manageable on a monthly basis. This can give you the breathing room to get your finances back under control and start repairing your credit score.
• Bankruptcy releases you from your debts, although it’s typically used by people with valuable assets and debt. Declaring bankruptcy can also prevent you from getting work in certain sectors like banking.
• Individual Voluntary Arrangements are similar to DROs, but differ in a few critical ways. IVAs are more common when a person has a high debt level, yet has a regular income and can afford to make some repayments. Additionally, IVAs don’t stop payments. Rather, they make them more manageable for five years, after which remaining debts are written off.

Keep in mind that debt relief solutions like DROs, IVAs, and bankruptcy are all serious decisions that have long-lasting impacts on your credit score, employability, and reputation. Take the time to consider all of your options and consult with a debt advisor to get an experienced second opinion.

How to recover from a DRO

A Debt Relief Order can have a massive impact on your credit score for six years, which can leave you in a difficult place. However, you have options for getting your credit score back on track. One of the best ways you can do this is by building your payment history.

Your payment history is the most important factor in your credit score, and it makes sense why when you consider a lender’s perspective. A bank or lender, above all, wants to know that they’ll get their money back. When your payment history is short or virtually nonexistent, they don’t have much evidence to judge you on. That makes them hesitant to lend you money, whether that be a loan, credit card, or overdraft.

Finding ways to build your payment history during the six years a DRO is visible on your credit report can help you qualify for better credit products sooner. A few ways you can demonstrate your financial responsibility and your ability to make timely payments include:

• A credit builder loan: Credit builder loans are kind of like reverse loans. Instead of receiving the lump sum up front and then making payments, you pay the loan off first and then receive the lump sum. You may be able to qualify for a credit builder loan with a DRO on your credit report because you’re paying for the loan before receiving it, thus reducing the bank’s risk.
• A credit builder card: Credit builder cards are essentially the credit builder loan version of a credit card. Instead of using the card and then paying off your balance, you add a balance to the card before using it. This similarly demonstrates your ability to make payments without exposing the bank or credit card company to risk.
• A credit builder account: Pave can help you actively build your credit score with a credit builder account* that can help improve your credit utilisation and payment history. We’ll report your payment behaviour to Experian, Equifax, and TransUnion to maximise the benefit to your credit score. Pave can also help you protect your payment history by tracking upcoming bills to help you avoid a late payment. 

*Some features are subject to approval. Additionally note that if you’ve been put on an IVA, a DRO, or debt management plan in the last 12 months, using Pave to build your credit score may not be a good idea. This is because even if you build your credit score, many lenders may not extend credit to you on the basis of you having such markers on your credit file.

Develop healthy financial habits

Without developing new, healthy financial habits, you could find yourself back in debt after your DRO. This is a big risk, as it will be six years before you’re eligible for another DRO. To avoid being back in the stressful financial situation you just got out of, focus on adopting better financial habits like:

• Budgeting and tracking your spending
• Building an emergency fund*
• Staying up to date on other payments
• Avoiding additional debt

Habits like these can ensure that you enjoy financial stability in your post-IVA life.

*Keep in mind that significant assets like savings could break your DRO’s restrictions. If your situation changes, be sure to keep your debt advisor informed, otherwise you could be prosecuted or your DRO could be cancelled.

About Pave

At Pave, we know that money is a huge source of stress for people across the UK. That’s why we’re dedicated to making personal finance easier, through educational resources like this and our app that can help you rebuild your credit score.

To read more credit-building resources, check out our extensive library of articles, or download the Pave app today to join the hundreds of thousands who have improved their credit score with Pave*.

‍

*Results may vary. Pave cannot guarantee an increase in your credit score.