What is the difference between a DRO and bankruptcy?

4 May2021

There are some debt solutions designed to help borrowers even in the most difficult situation with their unsecured debts.

Unfortunately, some people find that they simply can't afford to repay whatever they owe on things such ascredit cards, personal loans and overdrafts - and therefore need to find a suitable way to face up to their debt problems that won't involve repaying everything.

If you're a resident of England, Wales or Northern Ireland and you find yourself in this situation, an insolvency solution such as aDRO (Debt Relief Order) or bankruptcy could be recommended as the best approach for you.

Although bankruptcy and DROs have some things in common - e.g. they're both forms of insolvency that can write off debt, designed to help people in a serious situation with their debts - they're also very different in other ways. Let's take a look how.

Bankruptcy: an overview

Bankruptcy is only suitable for borrowers who can't afford to repay their unsecured debts in any reasonable amount of time.

Once bankruptcy has been agreed through the County Courts, you will:

  • Make payments of whatever you can afford (if this is realistic) towards your debts for a period of up to three years
  • Stop any further legal action from your unsecured lenders
  • Have whatever remaining debt that you can't afford to repay written off once you've been successfully discharged - normally after 12 months.

Once you enter bankruptcy, your 'estate' - the legal term for your possessions - will be handed over to the 'Official Receiver', who is the court official in charge of overseeing the bankruptcy process. If you're a homeowner, your property will also be included as part of your estate - and anything included in your estate could be sold to help you repay some of what you owe your lenders.

Bankruptcy does also come with some serious consequences. If you're made bankrupt, you'll face certain professional restrictions (e.g. you won't be able to work as the director of a company), and your credit rating will be affected for six years - which is likely to make things such as getting a bank account or further credit difficult during this period.

We provide more bankruptcy advice on this page.

DROs: an overview

A DRO is a common term for a 'Debt Relief Order'.

DROs were introduced as an alternative to bankruptcy for struggling borrowers with a low disposable income and few assets.

How exactly could a DRO help you? Once your DRO has started, you:

  • Won't have to make any payments for a year. During this time, all interest and charges on your debts will be frozen, so your debts won't continue to grow
  • Will have your included unsecured debts written off if your circumstances haven't improved (by enough to let you make payments towards them) after the agreed 12-month period.

You'll only have to pay an application fee of 90 (which can be paid in instalments if necessary) - much less than the up-front fees for bankruptcy, which can cost up to 700 altogether.

Like bankruptcy, a DRO will be recorded on your credit file for six years from the day it starts - but it could still be the best option for you if you're unable to repay your debts, but you can't afford to apply for bankruptcy. However, there are some specific criteria you must meet in order to qualify - so it's important you get some professional advice before you make any decisions.

You can find out if you could qualify for a DRO by answering a few simple questions on this page.

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Tags: debt, debt relief order, unsecured debts, DRO, Bankruptcy, debt help

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