Debt Relief Orders (or DROs) are a low cost alternative to bankruptcy, offering debt relief to individual debtors who owe relatively little, have little or no disposable income, no assets to repay what they owe, and who cannot afford to make themselves bankrupt.

Guest article written by Jeremy Frost, a Licensed Insolvency Practitioner at Frost Group Limited

Debt Relief Orders

Debt Relief Orders (or DROs) are a low cost alternative to bankruptcy, offering debt relief to individual debtors who owe relatively little, have little or no disposable income, no assets to repay what they owe, and who cannot afford to make themselves bankrupt.

DROs do not involve the Courts; application is made online via “approved intermediaries”. The current application fee is £90, which can be paid in instalments over a 6-month period if necessary. It must be paid (in cash) to the Insolvency Service before any application will be considered.

Applications are considered and approved by the Insolvency Service (the Official Receiver), but applications are not approved automatically and may be refused in certain situations.

Eligibility & Applications

DROs are only suitable for people who do not own their own home, have little surplus income or assets and less than £15,000 of unsecured debt. In order to be eligible for a DRO, an applicant:

  • Must have unsecured debts of less than £15,000 and be unable to pay them
  • Have assets of less than £300 (excluding a motor vehicle worth less than £1,000)
  • Have surplus income of less than £50/month
  • Not be involved in any other formal insolvency procedure and have no pending bankruptcy petitions

Creditors whose claims are listed on a DRO application will receive formal notification from the Insolvency Service if a DRO is made, but you can see whether someone who owes you money is subject to a DRO by searching the Electronic Individual Insolvency Register at http://www.insolvency.gov.uk/eiir/ .

As a creditor listed in a DRO, you can lodge an objection with the Insolvency Service (within 30 days of being notified of the DRO) if:

  • Information supplied by the debtor was incomplete, incorrect or misleading
  • The debtor did not meet the qualifying criteria for a DRO; or
  • The debtor has already been made bankrupt or proposed an Individual Voluntary Arrangement (IVA)

During a DRO

Following approval of a DRO, which lasts 12 months, it is the Official Receiver (OR) who will continue to administer it, dealing with the creditors etc. The OR will also look into a debtor’s financial affairs both before and during the DRO and may report any misconduct, whether criminal or not, to the Court if appropriate.

Once a DRO is made, debts are subject to a moratorium and creditors may not continue or begin any legal action against the debtor, without leave of the Court. At the end of the moratorium, the debt is considered discharged.

If a debtor breaks the conditions of their DRO, a creditor can report any misconduct to the Insolvency Service. That said – will it result in a financial return to creditors? Maybe not!

Restrictions

During the period of the DRO the debtor:

  • Must notify a lender that he’s subject to a DRO, before obtaining credit of £500 or more, either alone or jointly with another person
  • Must not carry on business in a name that is different from that under which the DRO was granted, without notifying all those with whom he does business of the name under which the DRO was granted
  • May not act as a company director or be involved (directly or indirectly) with the promotion, formation or management of a limited company
  • Will not be eligible to apply for a DRO again for a period of 6 years

Obligations

Whilst subject to a DRO the debtor:

  • Must comply with the Official Receiver’s (OR’s) requests for information
  • Must inform the OR of any assets obtained or increases in income
  • Must not obtain credit of £500 or more without disclosing the DRO
  • Must not make payments direct to creditors included in the DRO

Exceptions

Certain debts, including Court fines and student loans, remain outside of the scope of a DRO, and for which a debtor will remain liable. He will also be liable for any debts incurred after the DRO has been made. He may be prosecuted if debts were incurred without disclosure of the DRO.

Options for creditors

Creditors should consider the following:

  • The debtor has very little means of repaying the debt
  • Pursuing the debt may be “throwing good money after bad” – is it worth it?
  • Although there are no large professional fees incurred with a DRO, there are likely to be no (or only very small) dividends paid out
  • In all probability the only return to a creditor will be by claiming VAT Bad Debt Relief – don’t forget to make a claim
  • If the debt is guaranteed or joint & several – seek collection from third party guarantors or co-debtors as soon as possible

Likewise, what can a creditor do regarding a debt incurred after a DRO is made? Bearing in mind the debtor has nothing, if they cannot repay debt A, they are certainly not going to be able to repay debt B. It would therefore be best not to allow them further credit or to seek deposits if applicable.
 

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