People often find it really hard to face up to their debt problems because they believe that there’s no real way out of them. Many people worry that bankruptcy is the only answer to serious debt issues, but there are other solutions that aren’t so drastic.
Two popular options for resolving serious debt issues are the debt relief order (DRO) and the debt management plan (DMP). They’re two very different solutions, so they’re suitable for different people and situations.
How debt relief orders work
A DRO is for someone in a tougher position than a DMP would work for. A DRO is suitable for someone who can’t make reasonable repayments on their unsecured debts and who therefore won’t be able to pay them in a reasonable amount of time.
A debt relief order is essentially a form of insolvency. Anyone with a DRO doesn’t have to repay the money they owe unless their situation improves within a year or so. There’s no realistic way the person could repay the money, so the situation is put on hold.
With a DRO, it’s not up to the lenders to decide on the application, it’s actually up to the official receiver. If the DRO goes through, there’s a moratorium on the debts for (usually) 12 months and the borrower won’t have to pay anything in that time. Their lenders can’t ask them to pay anything, either. If, by the end of the moratorium, the borrower’s situation hasn’t improved enough to start making payments, the debts are discharged.
How debt management plans work
A DMP can help people who can’t quite keep up with their unsecured debt repayments but are confident they can still make a reasonable payment each month and settle the entire debt within a reasonable time frame.
Essentially, a DMP is a fresh agreement between the borrower and their unsecured creditors. They’ll make smaller payments each month, which will mean they pay off the debt more slowly.
The creditors aren’t obligated to agree to a DMP, but most will do because it’s usually the best way for a well-intentioned but struggling borrower to get the money back to them. The whole amount is paid off and working out a DMP with the borrower is preferable to lengthy and costly legal proceedings.
If you get your DMP, then you must make your payments every month until the debt is cleared. If your finances improve during this period then you should increase the payments to settle the debt as soon as possible.
The downsides of DROs
A DRO has a very serious impact on the borrower’s credit rating for up to six years and their details will also be entered into the Individual Insolvency Register.
There are also very strict criteria for getting a DRO, including owing less than £20,000, having less than £50 in disposable income every month and having assets worth more than £1,000.
The downsides of DMPs
The mere fact that someone is paying their debts off more slowly than they initially agreed to will affect their credit rating for up to six years. This is the case even if a DMP is involved.
It also means that the debt might cost more, as there’ll be more interest and charges applied to the amount. Often, a lender will offer to waive interest and charges, but they’re not obligated to.