Introduced in 2009, Debt Relief Orders (DROs) have become a widespread debt management scheme for those on low incomes and with limited assets. In the last quarter of 2018 according to Credit Strategy magazine, DROs represented 22.3% of all personal debt management schemes, whilst IVAs represented 64.5% and bankruptcies 13.2%.
DROs were introduced as an alternative to putting those on low incomes through the more arduous bankruptcy process. Policymakers felt that the costs associated with bankruptcy unfairly burdened those on lower incomes and were an inefficient use of the Court's resources. DROs are submitted to the Official Receiver's office by an 'approved intermediary' (i.e. the Citizens Advice Bureau). If the Official Receiver accepts the application, the DRO is registered.
To qualify for a DRO you need to:
- owe less than £20,000
- have less than £50 a month spare income
- have less than £1,000 worth of assets
- have lived or worked in England and Wales within the last 3 years; and
- have not applied for a DRO within the last 6 years
The effect of a DRO is akin to bankruptcy. Once granted, the debtor is protected by a moratorium from debt enforcement. The debts are then discharged after 12 months. DROs inevitably impact on the debtor's credit rating and future ability to borrow. However, the more streamlined approach reflects policymakers' intention to make personal insolvency a more rehabilitative as opposed to punitive process which is particularly important for those with limited means.
DROs are reflective of an increasingly flexible approach to personal insolvency. The formal process of bankruptcy is not nearly as popular as it was in the previous major recession of the 1990s. This is likely a consequence of creditors weighing up the increasing costs of enforcement versus the amount sought for recovery.
Next week, look out for a post on IVAs.
£2.3 billion debt relief granted in 10 years of DROs