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Bankruptcy or a Debt Relief Order? - The Debt Advice Service
  • Bankruptcy or a Debt Relief Order?

    Bankruptcy or a Debt Relief Order? What are they?

    Bankruptcy

    Going bankrupt is a way to clear your debts by releasing your assets to creditors. Bankruptcy can be court-ordered if you owe more than £5000 in debt to a single creditor. Bankruptcy normally ends after a year; this is known as “discharge.”  After discharge your debt will be cleared, although some debts such as court fines and student loans will still need to be paid off.

    DRO

    A Debt Relief Order (DRO) is a debt solution for people with fewer assets to release and less income. To apply for a DRO you need to speak with a DRO adviser who will help you fill out your application. DROs usually last for a year, and you won’t be required to make any payments towards debt that the agreement covers, unless your financial situation improves.

    Eligibility for Bankruptcy

    There isn’t a minimum amount of debt you need to be eligible. If your unsecured debts total more than the things of value you own, then bankruptcy is an option for you. Before you can apply you need to speak with a debt adviser, who will assess your assets and tell you if you are eligible. You will also need to create an application and declare information about your assets and income. These include:

    • Debts
    • Employment & Income
    • Pension
    • Bank Accounts
    • Assets (including your home, car, and personal belongings)
    • Outgoings
    • Letters from bailiffs or enforcement agents

    Eligibility for a Debt Relief Order

    DROs have stricter requirements for eligibility than bankruptcy. In order to apply you must:

    • Be unable to pay your debts
    • Have debts totalling less than £30,000
    • Not own assets or items of value worth more than £2000 (excluding items required for your job and basic necessities)
    • Have too little spare income to make payments
    • Not have had a DRO for the last 6 years and aren’t undergoing another formal insolvency procedure (such as bankruptcy or an IVA)
    • Have lived in England or Wales for the last 3 years

    If you own a vehicle valued at less than £2000, you don’t have to include it in your assets. If you have a disability and therefore own a modified vehicle, you also don’t need to include it. Also, you can only exclude 1 vehicle from your assets but not if it is only used for work.

    You must inform your adviser if in the last 2 years you have:

    • Given away assets
    • Sold assets for less than their value
    • Prioritised paying one creditor or relative over others

    Debts NOT Covered by DROs and Bankruptcy

    Both these solutions cover most debts, but with some exceptions. You will still need to make payments towards these.

    • Magistrates court fines
    • Confiscation orders (court-ordered)
    • Maintenance payments
    • Child Support payments
    • Student loans
    • Debts related to personal injury or death of another person*
    • Social fund loans

    Advantages of DROs and Bankruptcy

    BANKRUPTCY

    DEBT RELEIF ORDER (DRO)

    No contact from creditors

     

    You don’t have to make payments towards covered debts

    “Exempt goods” can be kept

     

    No contact from creditors

    You can keep some of your income

     

    Low cost of £90 to set up

    If you need to make payments from your income, it will only be for 3 years maximum

     

    No need to appear in court

    Creditors must stop most types of court action

     

    Only public for a short time after debt is cleared

    Disadvantages of DROs and Bankruptcy

    BANKRUPTCY

     

    DEBT RELEIF ORDER (DRO)

    Credit rating affected for 6 years

     

    Credit rating affected for 6 years

     

    £680 cost – £130 Adjudicator fee and £550 deposit for application.

     

    Not available in Scotland

    Payments will need to be made if your income is high enough

     

    Appears on a public register for the length of your agreement, plus 3 months

    In order to take out a loan of £500+, you must inform the lender that you are bankrupt

     

    In order to take out a loan of £500+, you must inform the lender that you have a DRO

    You may be forced to sell your home

     

    You may have your bank account closed and need to create a new one

    If you rent, your landlord may end your tenancy

     

    No power of attorney over the financial affairs of someone else

    Some personal possessions may be sold

     

    No one can hold power of attorney over your financial affairs

    You may lose your job

     

    You cannot set up a business, or take over and existing one, without permission from the court

    Your business may be closed down

     

    If you run another business, you will need to inform them that you have a DRO

    May affect your immigration status

     

    May affect your immigration status

    Your bankruptcy will be made public permanently

     

    Your landlord may still evict you due to late rent payments, even if they are covered by your agreement

    Which is better?

    Although similar, one option will fit your financial situation better, so take the time to consider the advantages and disadvantages before making your decision. DROs and bankruptcy should always be a last resort option, they will harm your future credit rating for a long time, no matter how your financial situation changes.

    For more information about DROs, bankruptcy and other debt solutions, take a look at our other debt solutions page or get in touch on 0800 254 5112 for free professional advice.

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