Millions of people who are struggling in problem debt will be able to apply for their payments to be written off from Tuesday as an extension on current rules come into force.
Debt relief orders (DROs) can be used to tackle a range of debt up to £30,000 from June 30.
That means people will be given more options if they’re drowning in arrears – including on bills such as council tax.
People in debt with £75 or less leftover each month after covering bills and everyday expenses will be able to get a DRO - previously the amount was set at £50.
A DRO means you don't have to repay debts for an agreed period of time, usually a year, and creditors can't take action against you.
Previously the limit to apply for a debt relief order was £20,000 and anyone with debts over this amount had to go for more complicated individual voluntary arrangement (IVA) or bankruptcy.
It's estimated that around 13,000 people a year will now be eligible for a DRO – although the support costs a one-off £90 to access.
The change to DRO rules follows a consultation by the insolvency service early this year. It also includes a doubling of the limit on the value of assets owned to be eligible.
Those with savings or assets worth £2,000 or less are now eligible for a DRO - this was previously £1,000.
There is also an increase to the "surplus income" limit to qualify for a DRO.
A DRO is simpler and cheaper than other debt options.
Debt adviser Sara Williams who writes the DebtCamel blog, said: "It you qualify for a DRO it is always a better option for you than an IVA - you don't have to make any monthly payments in a DRO, compared to paying for five or six years in an IVA.
"So a DRO is cheaper and it is all over much quicker than an IVA - and it is also less risky. Only about 1% of DROs fail, but more than a quarter of IVAs do."
Lorraine Charlton, a debt expert at Citizens Advice said the measures are desperately needed with so many families struggling after a year of job cuts.
“From tomorrow, if you can’t pay debts of up to £30,000, don’t own your own home, and don’t own assets worth more than £2,000, a debt advisor might be able to help you get a Debt Relief Order. To be eligible, you need to have very little surplus income left after paying your essential costs every month.
“A Debt Relief Order usually lasts a year and you won’t have to make any payments towards most debts during that time. If your situation hasn’t improved when the Debt Relief Order ends, most of your debts will be written off.”
“With many more people likely to be struggling with unmanageable debt because of the pandemic, this is a welcome change.
What debts can you write off with a debt relief order?
Credit cards
Overdrafts
Bank loans
Arrears utility bills, telephone bills, council tax and income tax
Benefits overpayments
Hire purchase arrangements
Buy now - pay later agreements
Bills for services like vets or solicitors
Friends and family loans
Magistrates court fines and confiscation orders relating to criminal activity
Child support and maintenance
Student loans
Who can get a debt relief order?
To get a debt relief order (DRO) you need to fall into one of the following categories:
You owe less than £30,000
You don't have savings or own assets worth more than £2,000
You don't have a vehicle worth more than £2,000
You don't have spare income each month after essentials of £75
You'll also be eligible of the following apply:
You don't own your own home
You've lived or worked in England and Wales in the last three years
What debts can I use a debt relief order for?
What the long term complications of a debt relief order?
A DRO means your debts are written off, and your creditors can't ask for payments – but there’s quite a lengthy amount of small print involved.
A DRO usually lasts for a year and at the end of the DRO period, your debt is "discharged" and any money you haven’t paid off is cancelled.
A DRO will stay on your credit record for six years, which means you may struggle to take out a loan or buy a house, for instance, years after the DRO ends.
Private landlords and lettings agents may also check if you have a DRO when doing a credit check, meaning it could affect your housing situation further down the line.
Your bank can also freeze your account if you have a DRO, or stop you from opening one.
During the DRO period you'll also have some restrictions.
You won't be able to borrow more than £500 without letting the lender know about the DRO, and you can't set up a limited company or become a company director.
Your name and address will appear on the insolvency service's Individual Insolvency Register, which is free for anyone to look at, for the period of the DRO and for three month after.
How can I apply for a debt relief order?
To get a DRO you'll need to apply through a DRO adviser who makes the application to the Insolvency Service. Citizens Advice can put you in touch with the right person.
An official receiver at the Insolvency Service will consider your application. You'll have to pay a £90 fee.
Your application can either be accepted, deferred until there's more information, or declined.
If you're turned down you'll be told why and you can appeal the decision.
If you're accepted, you won't have to make payments on the debts and the creditors won't be able to take any action against you, with two exceptions: landlords if you're in rent arrears and bailiffs who've taken your belongings.
Other bills not included in the DRO will have to be paid as usual.
If you’re searching for more short term support, you may qualify for a 60-day "breathing space" instead.
This protects you from prosecution and bailiffs for up to two months.
A debt charity such as Citizens Advice or the National Debtline can help find the best support for you.
