A Debt Relief Order (DRO) can help resolve a debt problem if you have little or no money available to repay what you owe. If you start a DRO your debt will be taken away from you and you do not have to make any more monthly payments. After 12 months the debts are written off leaving you to continue with your life debt free.

However there are strict criteria that you must meet before you will be allowed to start a DRO. One of these is that you are not allowed to be a home owner. But what if you own a property which is in negative equity and therefore in effect worth nothing?

If you own property in negative equity can you do a Debt Relief Order?

Not everyone is eligible to use a Debt Relief Ortder. One of the main criteria you have to meet is that other than normal household items such as clothes, furniture and home appliances you are not allowed to own assets valued at more than £300. Your car can be worth up to £1000. But if you are a home owner your property is likely to be worth far more than £300 and so by default  you are not eligible to use the solution.

But what if your house is in negative equity? This means that the property has no monetary value. It would therefore seem reasonable to assume that your assets were still less than £300.

However for the purposes of a  DRO what counts are gross assets. This is the value of any assets before any money owed on them is taken into account. Given this the value of your house is taken before your mortgage is deducted. This allows for the potential growth in value you have in the property once the mortgage is repaid. As such even if your property is in negative equity you still do not qualify.

Are the Debt Relief Order rules fair if you own property? 

At first it may seem as though the rules surrounding Debt Relief Orders have been ill thought out. If you own property in negative equity you are just as likely to be struggling with debt as someone who does not and the asset is no more use to you.

However the idea behind the solution was originally that they were to help the poorest people deal with debts which they would otherwise have no means of resolving. The rules were therefore set to make sure that only these people can benefit. If you own a house you do at least have the opportunity of your asset increasing in value in the future.

BMD Tip: Since DROs were introduced into the law in 2009 one change to the rules has been made. Previously if you had a pension pot worth more than £300, you were not eligible for a DRO. This was deemed unfair given that pension funds are not available to creditors if you declare bankruptcy. As such from 6th April 2011 people with a pension fund who meet the other criteria will be eligible.