Are you struggling with debt and unsure which solution is right for you? Deciding between a Debt Relief Order vs Debt Management Plan can be quite difficult without proper insight. Both options offer unique benefits and drawbacks, and making the right choice depends on your specific financial situation.

This guide will help you understand both options and make an informed decision. Let’s dive into the details of each to see which fits your situation best.

Table of Contents

1. What is a Debt Relief Order?
2. What is A Debt Management Plan?
3. Choosing the Right Debt Solution
4. Additional Advice and Guidance
5. Conclusion
6. Key Points
7. FAQs

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What is a Debt Relief Order?

A Debt Relief Order (DRO) is a formal, legally binding agreement between you and your creditors. DROs come with specific features. Let’s go through some of them in detail below.

Once you get approved for a DRO, you won’t have to make any payments for a full year. This is called the moratorium period. This gives you valuable time to focus on finding a new job and improving your financial situation.

During this period, you’ll be required to actively look for a job during the moratorium. The key here is whether you’ll be able to find a new opportunity that significantly improves your finances. Finally, after 12 months, your situation will be reassessed to see if you’re back on track and can resume regular payments.

If your financial situation hasn’t improved after 12 months, and you’re still unable to pay your debts, your debts are completely written off. This can be a huge turning point, allowing you a fresh financial start.

Throughout the 12-month moratorium period, creditors are legally prohibited from taking any action against you. This means that you’re protected from stressful calls, lawsuits, and wage garnishments. This legal shield gives you valuable breathing room to focus on rebuilding your finances.

Compared to bankruptcy, a Debt Relief Order (DRO) offers a much faster path to debt relief. While bankruptcy can drag on for three years or more, a DRO can be completed in just one year. This quicker resolution can be incredibly appealing, especially if you’re facing overwhelming financial pressure and need a swift solution.

Additionally, DROs are generally considered less complex than bankruptcy proceedings. The streamlined process means less paperwork and fewer hurdles to jump through, simplifying your life during a difficult time.

The eligibility criteria for a DRO are strict, ensuring it is only available to those in significant financial distress. So, in order to be eligible for a DRO, you need to meet the following:

Your total debts must not exceed £30,000.
You should have less than £75 in disposable income per month after essential expenses.
You must have lived or worked in England or Wales for the past three years.
Your assets should not exceed £2,000 in value, with an additional allowance for a car worth up to £2,000.
You cannot have had a DRO in the past six years.

However, it’s important to note that even if you meet all these criteria, approval is not guaranteed, and a non-refundable application fee of £90 is required.

Pros:

Erase most debts after one year (if your situation stays the same).
Creditors freeze interest and charges for one year.
Designed for those with few assets, so you likely won’t lose belongings.
Covers most debts.
A legally binding agreement that protects you from creditors (once approved).

Cons

Damages credit rating and stays on record for six years.
Can be revoked if your financial situation improves within one year (debt returns with interest).
Can’t apply if you’ve had a DRO or used an insolvency option in the past six years.
Don’t qualify if your assets total more than £2,000.

Before we move on to the next section, note that if you’re struggling with debt and need some guidance on which debt solution is suitable for you, you can reach out to our Money Advisor team:

What is A Debt Management Plan?

A Debt Management Plan (DMP) is an informal agreement between you and your creditors. But what is a debt management plan? Here’s how it works:

You make reduced monthly payments based on what you can afford until the debt is fully repaid. Payments are adjusted to match your financial capability, and you make a commitment to repay the debt in full, albeit at a slower pace.

The flexibility of DROs is a major draw. There are typically no strict eligibility requirements, making them accessible to a wide range of people in debt.

This inclusivity can be a game-changer for those who may have been shut out of other options. DMPs also boast adjustable terms, meaning the program can adapt as your financial situation changes.

This adaptability ensures the program can continue to meet your needs as you work towards becoming debt-free. So, if you’re looking for a flexible solution to manage your debt, a DMP could be the answer.

Unlike a Debt Relief Order (DRO), a Debt Management Plan (DMP) doesn’t offer legal protection from your creditors. This means they can still pursue legal action to recover their debts, such as court appearances or enforcement actions. If this potential for legal action makes you uneasy, a DMP might not be the best choice.

Additionally, DMPs rely on the willingness of your creditors to accept your reduced monthly payments. So, if you’re not confident in your negotiation skills or the likelihood of creditors agreeing to the plan, a DMP may not be as effective.

Weighing the pros and cons of a DMP is crucial to making an informed decision, which will help you to decide Debt Relief Order vs Debt Management Plan which is better. What are the advantages and disadvantages of this debt solution? Let’s find out.

Pros:

Your financial struggles are not on a public record.
Reduced payments may affect your score, but you avoid being listed as insolvent.
You can keep your car, house, and other belongings.
Payment amounts can be adjusted based on your circumstances.
Available to anyone with debt, regardless of the amount.

Cons

Creditors can still sue you.
The plan relies on creditors accepting reduced payments.
Reduced payments can lower your credit score for several years.

Choosing the Right Debt Solution

Choosing between Debt Relief Order vs Debt Management Plan depends on your financial situation. Here are some tips to help you decide:

Debt Relief Order (DRO) could be a solution for you if your total debts are under £30,000 and you have few assets. Here are some key points to consider:

First, check if your total debt falls within the £30,000 limit. DROs are most suitable for manageable debt levels.
Consider if a DRO aligns with your goals. It offers a relatively quick way to resolve your debts compared to other options.

If you’re struggling with debt and your disposable income after essential expenses is under £75 per month, a Debt Relief Order (DRO) might be a way to get some relief. So, in short, if your disposable income is low and you’re dealing with unmanageable debt, that’s your sign that a DRO could be a helpful solution.

When considering debt relief options, the value of your assets becomes a key factor. If you have a significant amount of wealth, a Debt Management Plan (DMP) might be a better choice compared to a Debt Relief Order (DRO). DROs come with strict asset limits, meaning they may not be an option if your possessions exceed that threshold.

To make an informed decision, it’s crucial to evaluate your assets. This involves making a list of everything you own and determining its total value. If the combined worth surpasses the DRO limit, a DMP becomes a more viable path. DMPs allow you to keep your assets while creating a structured repayment plan with your creditors.

Ultimately, the choice boils down to prioritizing asset security or faster debt resolution. Consider which is more critical for your financial peace of mind. If keeping your assets is a top priority, a DMP provides a way to manage your debts while safeguarding your possessions.

However, if achieving debt freedom quickly outweighs asset concerns, a DRO could be the answer, even if it means letting go of some assets.

When dealing with debt, avoiding legal action is often a top priority. A DRO can offer significant legal safeguards in this regard, protecting you from creditors’ actions. Consider how important this level of security is to your situation.

If the risk of creditor lawsuits or other legal measures is a major concern, a DRO might be the right path. On the other hand, if you’re comfortable managing the potential for creditor actions, a DMP might be a viable option. Weigh the level of legal protection you need against the potential risks associated with a DMP before making a decision.

Additional Advice and Guidance

If you’re struggling to decide which debt solution is suitable for you when it comes to Debt Relief Order vs Debt Management Plan, we recommend that you reach out to a debt charity for advice and guidance. Some debt charities available in the UK are as follows:

National Debtline
Citizens Advice
StepChange

Alternatively, feel free to fill out our online form, and our Money Advisor team will guide you.

Conclusion

Understanding the intricacies of a Debt Relief Order vs Debt Management Plan can guide you towards the best debt solution for your needs.

Whether you choose to apply for a debt relief order or opt for a debt management plan, knowing the details and restrictions is vital. By evaluating your financial situation and considering the pros and cons, you can make a well-informed decision.

Key Points

DRO is a formal agreement that writes off debt after one year if your financial situation doesn’t improve, while DMP is an informal plan for reduced monthly payments until the debt is repaid.
DRO offers legal protection from creditors during a 1-year moratorium period, whereas DMP doesn’t.
To qualify for DRO, your total debt must be under £30,000, you must have low disposable income and limited assets. DMP has no strict eligibility requirements.
DRO benefits include debt erasure, frozen interest and charges, and quicker resolution compared to bankruptcy. However, it damages your credit rating and can be revoked if your finances improve.
DMP allows you to keep your belongings and adjust payment amounts, and it doesn’t leave a public record of your financial struggles. However, creditors can still sue you, and your credit score might be lowered.
To choose between DRO and DMP, consider your debt level: DRO is suitable for manageable debts under £30,000.
If your disposable income is very low, DRO might be a better option than DMP.
If you have assets exceeding the DRO limit, DMP might be the only choice.
When legal protection from creditor lawsuits is a priority, DRO is the better option.
If you’re unsure which option is best, seek advice from a debt charity.

FAQs