For debtors with limited liabilities, little surplus income and minimal gross assets, the new Debt Relief Order (DRO) is a further tool to consider in managing their debts. DROs, which came into force on 6 April 2009, are aimed at those who find they are unable to pay off their debts within a reasonable time but for whom other forms of debt relief, such as bankruptcy or Individual Voluntary Arrangements, are unavailable, or perhaps unaffordable.
What are the criteria for a DRO?
A DRO can be applied for where the debtor:
- is unable to pay his/her debts
- has total unsecured liabilities not exceeding £15,000
- has total gross assets not exceeding £300
- has disposable income, after deducting normal household expenditure, not exceeding £50 per month
- is domiciled in England or Wales or has been resident here or has carried on business here for the last three years
- has not been subject to a DRO in the previous six years
- is not involved in any other formal insolvency procedure at the time of application
Homeowners are unlikely to qualify for DROs as their gross assets are likely to exceed £300. Cars worth less than £1000 are exempt from the calculation of the gross assets.
How is a DRO obtained?
Application is made online to the Official Receiver (OR) through an approved intermediary – such as the Citizens' Advice Bureau. The debtor should disclose all debts owed which will then be included in the schedule to the DRO if it is made. The fee is £90 and the order is made without reference to the court if the criteria are met.
The debtor is obliged to cooperate fully with the OR and is under a duty to provide full and frank details of his/her financial circumstances, including if they change for the better. Failure to do so can lead to the DRO being set aside thereby allowing all creditors to pursue their debts. Criminal and civil sanctions can be imposed against debtors who abuse the system and the period of the DRO can also be extended.
What is the effect of a DRO?
The DRO will generally last for 12 months and during this time the debtor cannot:
- obtain credit exceeding £500 without disclosing the DRO to the lender. This applies equally to applications for joint credit
- promote, manage, form a limited company nor act as a company director without the permission of the court
- carry on business in a name other than that appearing on the DRO without notifying those he/she is doing business with of the existence of the DRO
- obtain more than one DRO in a six year period
The debtor's assets do not vest in the OR and no dividend is paid to the creditors included in the DRO. During the period of the DRO there is a moratorium preventing creditors from taking enforcement action. At the end of this period the debtor is free from the debts scheduled within the DRO. Creditors included in the DRO cannot take enforcement action against the debtor either during or after the DRO.
The DRO will be registered on the Insolvency Register which is fully searchable and so will also affect the debtor's credit rating.
How is a DRO notified?
Creditors included in the DRO will be notified by the OR in standard form by email or post. Details of all the creditors scheduled in the DRO, together with the amounts of the individual debts, will be included in the notification. No other notification will be sent unless the DRO is revoked or extended.
Can a creditor object?
Yes. Creditors having evidence indicating that the debtor does not meet the criteria for a DRO can notify the OR who can consider the information and revoke the DRO if appropriate. Objection should be made within 30 calendar days of the DRO being granted although the OR can consider late objections.
What if a creditor is not included in a DRO?
If a debtor fails to list a creditor, the creditor is unaffected by the DRO and can pursue its debt in the ordinary way. Creditors are not under any duty to notify the OR of an omission. However, if the omitted debt would have brought the level of unsecured liability over the £15,000 limit and the OR becomes aware of it, the DRO will be revoked.
Debts incurred after the DRO has been made continue to be enforceable in the usual way.
What if the debt is secured or relates to a Hire Purchase (HP) agreement?
The rights of secured creditors to deal with their security are unaffected by the making of a DRO and such creditors will not receive notification of the DRO.
Outstanding balances on HP agreements will be included within the £15,000 liability limit though the asset will not be included within the total gross asset calculation as the debtor does not own the asset. Once the DRO is made, instalment payments will cease and the outstanding balance will be discharged at the end of the DRO. The owner of the asset can however recover the asset under the terms of the HP agreement.
Given the criteria, and particularly the relatively low level of gross assets and unsecured liabilities required, many debtors will find themselves outside the scope of DROs and lenders will be able to pursue their debts as normal. However, where a DRO is made, lenders should consider the following:
- where there are joint debts or a guarantee, the debt can still be pursued against those not subject to a DRO
- secured debts and debts omitted from the DRO (for whatever reason) can continue to be enforced
- debts incurred after the making of the DRO can be enforced in the usual way and are not affected by the DRO
- if the DRO is revoked, creditors are free to pursue those debts that were originally included within the DRO. Consideration should therefore be given to not writing debts off immediately on the making of a DRO but monitoring them for a period of time in case revocation occurs.