How Does a Debt Relief Order Work? A Complete Guide for UK Residents

If debt feels like a heavy weight you can’t shake off, you’re not alone. Many people in the UK struggle to keep up with repayments, and one question often comes up: how does a debt relief order work? This low-cost legal solution can help wipe certain debts if you meet the criteria, offering a fresh start without the pressure of constant creditor calls.

In this article, we’ll break down everything you need to know about debt relief orders in clear, simple terms. You’ll learn what they are, who’s eligible, how they compare to bankruptcy, the step-by-step application process, and the main pros and cons. By the end, you’ll have a clear picture of whether a DRO could be the right path to getting your finances back on track.

What is a Debt Relief Order and How Does it Work?

A Debt Relief Order (DRO) is a formal, low-cost way to deal with smaller debts if you have little income and few assets. If you’ve been asking how does a debt relief order work, it’s essentially a legal process that protects you from your creditors for a set period, giving you breathing space and a chance for a fresh start.

The Purpose of a DRO

The aim is to give people who meet strict eligibility criteria the chance to write off debts they cannot realistically repay. It’s often described as a cheaper, simpler alternative to bankruptcy for those with lower debt levels.

The 12-Month Period (Moratorium)

When your DRO is approved, it lasts for 12 months, known as the “moratorium period.” During this time:

• You stop making payments towards the included debts.
• Interest and charges on these debts are frozen.
• Creditors cannot take legal action or contact you for payment.

What Happens at the End?

If your financial situation hasn’t improved after the 12 months, the debts covered in the DRO are written off completely. You won’t have to repay them, although your DRO will stay on your credit file for six years, affecting your ability to get credit in the future.

While a DRO can be a powerful tool, not everyone qualifies. Next, we’ll look at the exact debt relief order eligibility rules to see if you could apply. 

Debt Relief Order Eligibility

The government sets strict conditions for DROs to ensure they’re only used by those in genuine financial hardship. You must meet all the criteria to qualify.

Key Criteria You Must Meet

Debt and Asset Limits

• Debt limit – Total qualifying debts must be £50,000 or less.
• Asset limit – You must own assets worth £2,000 or less in total.
• Vehicle value – If you own a car, it must be worth £4,000 or less (unless specially adapted for disability).

Income Restrictions

• Your disposable income, after essential living costs, must be £75 or less per month.

Other Requirements

• You must have lived, owned property, or run a business in England or Wales in the last 3 years.
• You must not be bankrupt, in an IVA, or have had a DRO in the past 6 years.

Why These Rules Exist

These limits make sure that DROs are reserved for people who truly cannot repay their debts within a reasonable time. If you fall outside these rules, other solutions, such as a debt management plan or an individual voluntary arrangement (IVA), may be recommended instead.

Now that you know whether you might qualify, the next big question is: How does a DRO compare to bankruptcy, and which option could suit you better?

DRO vs Bankruptcy

Choosing between a Debt Relief Order (DRO) and bankruptcy can feel overwhelming, but the differences are clear once you break them down. Both options help deal with unmanageable debts, but they vary in cost, process, and the impact on your finances and assets. Understanding these differences will help you decide which route might suit your circumstances best.

Key Differences in Cost

One of the biggest differences between a DRO and bankruptcy is the cost.

• DRO – Since April 2024, there’s no fee to apply for a DRO in England and Wales.
• Bankruptcy – Applying for bankruptcy costs £680, which must be paid before your application is submitted.

Differences in the Process

A DRO is simpler and does not involve the court. Instead, you apply through an approved intermediary, and if successful, your debts are frozen for 12 months and then written off. Bankruptcy is more formal, handled by the Insolvency Service, and can involve selling assets to repay creditors.

Impact on Your Finances

Both solutions stay on your credit file for six years, making it harder to borrow in the future. Bankruptcy can have a greater impact on your assets and may involve restrictions for longer, while a DRO is designed for those with minimal assets and lower debts.

When One May Be Better Than the Other

• Choose a DRO if your debts are under £50,000, you have minimal assets, and your income is very low.
• Consider bankruptcy if your debts exceed the DRO limit, you have more valuable assets, or your income is higher but you still cannot meet repayments.

If you believe a DRO is the right choice for your situation, the next step is knowing exactly how to apply and what debts it can cover.

How to Apply for a Debt Relief Order

If you meet the eligibility criteria and believe a DRO is the right solution, the application process is straightforward but must be done through the correct channels. You cannot submit the application yourself, a qualified intermediary will guide you through each step and ensure your application meets all the requirements.

Applying Through an Approved Intermediary

You cannot apply for a DRO yourself. The process must be handled by an approved intermediary, usually a qualified debt adviser from a recognised organisation such as Citizens Advice, StepChange, or PayPlan. They will:

• Assess your financial situation, including debts, income, and assets.
• Check whether you meet all the eligibility criteria.
• Complete and submit the application to the Insolvency Service on your behalf.

Debts That Can Be Included

A DRO can cover most common unsecured debts, such as:

• Credit cards, personal loans, and overdrafts.
• Council tax arrears.
• Utility bill arrears.
• Rent arrears.
• Benefit overpayments (except in cases of fraud).

Debts That Cannot Be Included

Certain debts are excluded from a DRO, including:

• Student loans.
• Child maintenance or support payments.
• Court fines.
• Social fund loans.

Once your application is submitted, it usually takes a few weeks to receive a decision. If approved, you’ll enter the 12-month moratorium period where your creditors cannot take action against you.

The next step is to look at the real advantages and disadvantages of a DRO, so you can decide if it’s the right solution for your circumstances.

Pros and Cons of a Debt Relief Order

A Debt Relief Order (DRO) can be a lifeline if you’re struggling with unmanageable debts, but it’s important to weigh the benefits against the downsides before making a decision. Like any debt solution, a DRO has lasting effects on your credit file and overall financial situation, so knowing what to expect will help you prepare for the future.

Advantages of a DRO

A DRO can provide significant relief if you meet the eligibility criteria. The main benefits include:

• No application fee – Since April 2024, applying for a DRO in England and Wales is free.
• Legal protection from creditors – Once approved, creditors included in the DRO cannot contact you or take legal action.
• Frozen interest and charges – All interest and fees on included debts stop during the 12-month moratorium.
• Debt write-off – At the end of the moratorium, qualifying debts are written off completely if your circumstances haven’t improved.
• No asset loss for most applicants – Since you can’t have more than £2,000 in assets, most people keep what they own.

Disadvantages of a DRO

While a DRO can remove a heavy financial burden, there are potential drawbacks to consider:

• Credit file impact – A DRO stays on your credit report for six years, making it harder to borrow money during that time.
• Limited eligibility – Strict financial and asset limits mean many people won’t qualify.
• Possible revocation – If your circumstances improve or you give incorrect information, your DRO can be cancelled.
• Restrictions – During the DRO, you cannot borrow more than £500 without telling the lender about your order.

Long-Term Effects on Credit and Finances

A DRO will seriously affect your ability to get credit for six years from the date it’s approved. Even after it’s removed from your credit file, some lenders may still be cautious. However, for many people, the chance to start over without the burden of unmanageable debt outweighs the temporary restrictions on borrowing.

When considering a DRO, it’s best to speak to a qualified debt adviser who can explain how it compares to other options based on your personal circumstances.

Feel like a DRO is not the right option for you? Feel free to reach out to us today and we will guide you on the best course of action:

Conclusion

Understanding how does a Debt Relief Order work is crucial before deciding whether it’s the right path for your financial situation. A DRO offers a lifeline for those with low income, minimal assets, and unmanageable debts, helping them reset their finances without the high costs associated with bankruptcy. 

However, it also comes with restrictions, potential long-term credit impact, and eligibility limits that you must carefully consider.

If you meet the criteria, a DRO could give you the breathing space you need to focus on rebuilding your financial stability. On the other hand, if your situation is more complex or your debts exceed the limits, exploring alternative solutions, such as bankruptcy, an IVA, or debt management plans, may be more suitable.

Ultimately, the best decision comes from weighing the pros and cons, seeking professional advice, and choosing the route that aligns with both your current circumstances and your long-term financial goals. With the right approach, a fresh start is within reach.

Key Points

• A Debt Relief Order (DRO) is designed for individuals with low income, few assets, and debts they cannot afford to repay.
• Eligibility criteria include owing less than a set debt limit, having minimal assets, and a low disposable income.
• The DRO process is managed by an approved intermediary, who applies on behalf of the applicant to the Insolvency Service.
• Costs for a DRO are significantly lower than bankruptcy, with a fixed fee that must be paid before the application is submitted.
• Debts covered typically include credit cards, personal loans, and utility arrears, while certain debts like student loans and fines are excluded.
• Comparison with bankruptcy shows differences in cost, eligibility, impact on credit, and the level of public record.
• Applying for a DRO requires providing full financial details, debt information, and proof of income to an intermediary.
• Advantages include legal protection from creditors, debt write-off after 12 months, and lower costs compared to other insolvency options.
• Disadvantages include credit score damage, restrictions during the order, and ineligibility for those with higher debts or assets.
• Long-term impact requires careful consideration, as a DRO remains on a credit file for six years and can affect future borrowing.

FAQs

How does a DRO compare to bankruptcy?

A DRO is a simpler, lower-cost alternative to bankruptcy, suitable for individuals with smaller debts and fewer assets. Bankruptcy involves higher costs and more significant long-term consequences but may be appropriate for those with higher debts or more assets.

Can I apply for a DRO if I own a car?

Yes, you can own a car while applying for a DRO, provided its value is £4,000 or less. If the car is adapted for a disability, it may be excluded from the asset calculation.

How long does a DRO stay on my credit file?

A DRO remains on your credit file for six years from the date it is approved. During this time, it may affect your ability to obtain credit.

How do I apply for a Debt Relief Order?

To apply for a DRO, you must go through an approved intermediary, such as a debt adviser from Citizens Advice or StepChange. They will assess your financial situation, ensure you meet the eligibility criteria, and submit the application on your behalf.