Debt relief orders: A new way to deal with debt
From April 6th a new way of dealing with debts is being launched: Debt Relief Orders (DROs).
DROs are aimed at those with lower debts and smaller assets as an alternative to bankruptcy, or debt management plans or individual voluntary agreements (IVAs).
Daniel Barnes looks at whether DROs will make a difference - or provide a lifeline.
DROs
DROs are for people who are not homeowners, have less than £15,000 in debt, less than £300 in assets and less than £50 per month available income after they have met all their essential expenditure essentially slotting in below IVAs a means of dealing with debts that become too much for those previously without such an option.
In particular they are designed as a way of helping people on lower incomes deal with their debt problems and for those with no prospect of their situation improving.
After one year, the debtor is discharged, and with some exceptions, the remaining debts are written off.
Terry Balfour, director of IVA.com, explains DROs fill the gap below IVAs and debt management plans.
"They are an alternative to debt management plans, where people have an income of less than £50 a month.
"And an IVA, in theory, starts for debts over £15,000, although in practice it is higher. Also for an IVA income of between £250 and £300 a month would be needed."
He explains a debt management plan for a £15,000 debt where someone only had £50 a month free could take up at least 25 years to clear.
"A DRO is a better alternative than a debt management plan than might take a long long time."
Mr Balfour adds DROs give people the opportunity to start out afresh.
Living in debt
Citizens Advice finds the most common reasons for debt of those asking for help were low income, over-commitment, illness or disability and job loss.
But irresponsible lending, poor financial skills and big increases in the cost of living - especially on petrol, energy, water and council tax - have also played a major part in people's debt problems.
Coupled to the recession, with an increase in job losses and people finding their working hours cut, the burden of debt is growing.
On average Citizens Advice Bureaux (CAB) debt clients owe £16,971 and the charity estimates a third of its clients will fall into the DRO category.
Four in ten of those seeking debt help were living in fuel poverty and a quarter had council tax arrears which both could be covered by DROs.
Mini-bankruptcy
The conception of DROs comes after cases of people being in debt but unable to afford bankruptcy proceedings.
"They are described as mini-bankruptcy as you only have to pay 90 to the official receiver, whereas with bankruptcy it is £500, to £510 from April," says Beccy Boden Wilks, at charity National Debtline.
"They can cover council tax, energy debts and any unsecured loans. After 12 months, there is no payment to debts and that is it."
DROs do not cover court fines, criminal fines, child maintenance or student loans.
"As an option it is really good. For those with lower incomes it is another option and you can never have too many options," Ms Boden Wilks explains.
Last month Gordon Brown included DROs as one of a number of measures that he expected to aid consumers struggling to make ends meet because of the recession.
He said at the time: "The changes we're dealing with as a country right now are enormous. But we are determined to do our bit - when we see hard-working, hard-pressed people being buffeted about by a storm not of their making, we will never pass by on the other side."
It is estimated some 20,000 DROs will be issued in the first year with the number boosted by a backlog of cases passing through as people with debt problems have been told to wait until April 6th to take advantage of DROs.
Joseph Surtees at debt charity the Consumer Credit Counselling Service (CCCS) expects some 40,000 DROs to be used in the second year.
"We believe there is a backlog of cases expected to arise when DROs come online, and as people become aware of how to apply they should gain some momentum," he says.
"They have been adequately publicised, there has been quite a lot of info about them in the press."
Details
A DRO are applied for online through a trained advisor, or intermediary, approved by the Insolvency Service.
An application costing £90, which can be paid in instalments over six months is sent to an official receiver who will complete a credit check against the applicant and decide whether to grant the DRO.
If successful, the DRO will last for 12 months, during which the debtor should not make any payments towards their debts.
Creditors are also barred from taking any further enforcement action against the debtor, meaning those struggling with debts should not harassed by phone calls or bailiffs once the order is in place.
And as a person applying for a DRO has an income of under £50 a month, they are not demanded to pay debts over this period as is the case with debt management plans where a £100 monthly payment is required.
After 12 months, unless a person's finances have picked up, they can walk away from the debts.
However, DROs are not an option people can pick up off the rack and run with.
"Anyone facing financial difficulty should seek advice for the best and most appropriate solution," a spokesperson for the Insolvency Service said.
"They will look at if a DRO is appropriate and if they meet the criteria."
No easy option
Turning to a DRO is not a simple solution and is not without consequences, people are warned.
"DROs, like bankruptcy or IVAs, should not be treated as an easy option," says Mr Surtees.
Ms Boden Wilks, at National Debtline, also warns: "With all options for dealing with debt, there are implications, which is why you should get advice on the best options and weigh up the pros and cons.
"The main thing is they will affect your credit rating."
But the introduction of DROs should not change the way people deal with debts, especially, as Ms Boden Wilks explains, in the current climate where most people have debts over £15,000.
"If you have any problems, get advice. If a DRO is applicable then the advisor will mention it."
She adds people should try to work with their creditors over ways of restructuring debts, writing some off and allowing repayment at an affordable level.
Furthermore, if you receive a windfall or your financial situation changes, the debts do not go away.
"If you do receive a windfall, as will other forms of insolvency, you will have to hand it over to creditors," says Mr Balfour.
"Really when you get into debt, you should have the intention to pay back what you owe."
He adds: "Speak to a debt advisor and look at all the options and speak to two or three to get a balanced view.
"Shop around and see the best solution and when you feel definite that it is the right solution for the right circumstances, go ahead."
Comments
Newsletter sign up