The amount of debt allowed in a Debt Relief Order (DRO) has been increased from £15,000 to £20,000. Since being introduced in April 2009 it has become popular debt solution. About 2000 people in England and Wales begin a DRO every month. This number is now set to rise.
- What is the maximum amount of debt allowed in a Debt Relief Order
- Find out if you meet the criteria to start a Debt Relief Order
- What are the downsides of a Debt Relief Order
Amount of Debt allowed in a Debt Relief Order increased to £20,000
From the 1st October 2015 the amount of unsecured debt allowed in a Debt Relief Order was increased to £20,000. Since the solution was launched in 2009 the maximum level had been set at £15,000. This ceiling was always one of the things restricting the number of people who could use a DRO. As such the increase is very good news.
Previously if your unsecured debt was above £15,000 you would have not qualified to use the solution. Now many more people will be able to benefit from it. The advantages a DRO offers include the fact that it only costing £90 to set up. In addition there are no ongoing monthly payments towards your debts. After 12 months the moratorium period comes to an end and you are debt free.
The number of people who apply for a DRO is now expected to increase. However before making the decision to use this solution there are some other things you need to know. Not least there are a number of other criteria you will have to meet.
Who can start a Debt Relief Order
It is not only the amount of debt allowed in a Debt Relief Order that that you have to consider. There are other rules about your financial situation which you also have to fit within. The first of these is that you are not allowed to be a home owner. You must live in rented accommodation. This is the case even if your property is currently in negative equity.
Secondly the amount you can afford to pay towards your debts must be less than £50 a month. This amount is known as your surplus (or disposable income). It is calculated by deducting the total of your reasonable monthly living expenses from your monthly income including any benefits. It is important that you work out your surplus income before considering a DRO.
Thirdly you need to consider the value of your belongings. The current sale value of your assets must not be more than £1000 excluding your car. This amount was also increased on the 1st October 2015 from £300. £1000 does not sound like a lot. However the value of any essential items such as your furniture and clothes are exempt. In addition if you own a car you will also be able to keep it if you need it. However only if its value is less than £1000.
What are the downsides of a Debt Relief Order?
If the amount of debt you owe is less than £20,000 and you meet all the other criteria you might think a Debt Relief Order is an ideal solution for you. However there are some downsides of the solution you need to consider.
Firstly your credit rating will be negatively affected. A record of you having started a DRO will be put on your credit file and remain there for 6 years. This will severely restrict your ability to get credit in the short to medium term.
It is also important to be aware of what happens if your circumstances change for the better while you are in a DRO. If your income improves your disposable income could rise above £50/mth. If that happens it may mean that your whole DRO is revoked. You would then return to the position you were in before starting. You would be liable to repay your debt in full. Given this a DRO is not generally suitable if you believe your finances will improve during the next 12 months.