Debt relief order in England and Wales

debt reliefChapter 4 of the Tribunals, Courts and Enforcement Act 2007 established a new form av insolvency in England and Wales. This form of insolvency is called debt relief order (DRO) and is not the same thing as bankruptcy. Compared to traditional bankruptcy, the debt relief order is intended to be easier, quicker and cheaper. It is aimed towards debtors who have few or no assets and a low disposable income.

Debt relief order has been available in England and Wales since 6 April 2009 when the new law came into force.

At the time of writing, the fee for applying for a debt relief order is £90. If you can not pay the whole amount as a lump sum, you can pay it in instalments prior to applying for the debt relief order.

You can apply for a debt relief order without attending court.

What is a debt relief order?

If you are granted a debt relief order, you will not have to make any payments on your loans during a 12 month period. If your financial situation is still sufficiently bad after these 12 months, you debts will be written off.

The DRO will have an effect on your credit rating for six years.

The DRO will appear in the Individual Insolvency Register, a register that is open to the public.

If you do not follow the DRO-rules, the court can make a Debt Relief Restrictions Order (DRRO) against you. A DRRO can also be issued at the same time as your DRO is approved, if the court believes that you have been dishonest or are to blame for the situation you’re in. A DRRO can be in place from 2 to 15 years, which is much longer than the 12 months of restrictions that come with just a DRO.

drowning in debtAre you qualified for a debt relief order?

Not anyone with debts can get a debt relief order. There are several conditions that you need to meet in order to be approved for a DRO. Here are some of the most important ones (the list is not complete):

  • You must live in England or Wales, or have lived / carried out business there in the last three years.
  • You must owe £15,000 or less. If you have larger debts than this, a debt relief order is not possible.
  • You must be unable to repay your debts.
  • You must have £50 or less remaining per month after having paid for basic household expenses.
  • You can not have assets worth more than a total of £300. There are however a few specific assets that will not be included in that sum.- A car worth £1 000 or less.- Approved pensions

    – Household equipment and other basics that your or members of your household needs, including furniture, bedding and clothing.

    Please note that homes are not excluded, so if you own a home worth more than £300 you can not qualify for DRO.

  • You can not have obtained a debt relief order in the last six years.
  • You can not be involved in any other kind of formal insolvency procedure when you apply for a DRO. Three examples of formal insolvency procedures are bankruptcy restrictions or undertakings, interim order, and an individual voluntary arrangement in accordance with the Insolvency Act 1986.

What you must and mustn’t do once you have been approved for a debt relief order

erase debtOnce you have been approved for a debt relief order, there are certain rules you must adhere to. Below, you will find some of the most important ones (the list is not complete).

  • You are not allowed to act as a company director, or be involved in the ‘promotion, management or formation of a limited company’ without getting permission from the court.
  • You are allowed to obtain credit, but you are not allowed to obtain credit worth £500 or more without telling the lender that you are currently going through a debt relief order. This includes credits that you apply for together with someone else. It also includes ‘acting with the intention’ of getting credit, e.g. ordering something online without signing up for credit but then fail to pay for the item right away when it arrives.
  • If you apply for an overdraft facility, you must tell the bank or building society that you are currently undergoing a debt relief order. Also, you are not allowed to write cheques that you wont honour.
  • If you carry on business in a different name than the name that you had when you obtained the DRO, you must tell everyone that you do business with the name under which you were approved for an DRO.

Six situations where a credit card may be better than a payday loan

creditcardCredit cards are often a better solution than payday loans. Of course, it should be mentioned that many credit card companies will charge you an annual fee for your credit card. This should be taken into account when you compare credit cards with payday loans, and also when you compare different types of credit cards and debit cards with each other.

Below, you will find six situations where a credit card may be a better solution than a payday loan.

When you have an interest free or low interest credit card

There are many credit card companies that will give their costumers 50 days or more of interest-free credit, provided that you pay the bill in full on the maturity date. This is not the case with payday loans, where even a one week loan can rack up a substantial amounts of interests and fees. Take for instance the Wonga payday loan, which is very popular in the United Kingdom. At the time of writing, borrowing £100 for 7 days from Wonga would cost £12.89 in interest and fees. Borrowing £100 for 43 days (the longest time period offered by Wonga) would cost £50.87 in interest and fees.

Once your in a serious pinch, it can be difficult to obtain a credit card that offers short-term interest-free credit. It is therefore a good idea to plan ahead and research the pros and cons of getting this type of credit card when you don’t really need it. Even if you dislike the idea of using credit cards, it could still be a good idea to have one (provided it is low-cost) just as an extra layer of protection.

Once you do need access to immediate credit, e.g. because of an unforeseen emergency that is eating through your personal savings, you will be glad that you planned ahead and got a good credit card (or other credit solution) for yourself in advance.

When you need to borrow money for a very short period of time

payday loanMany payday loan companies have fixed fees on their payday loans. This has to do with the nature of the payday loan. Since a majority of payday loans are small and run for less than a month, even a payday loan with a huge interest rate will give the lender a fairly small amount of interest when it is paid back. The cost of setting up and administering the payday loan can easily exceed the interest charged on the loan. Compare this to the total interest paid to the bank over the years on real estate mortgage that you set up 25 years ago, and you can easily see why payday loan lenders are eager to attach fixed-fees to their loans.

What this means for you as a borrower is that even if you just need to borrow money until your next paycheck arrives in four days, you will still pay dearly for your payday loan. It is not uncommon for payday loans to have a fixed fee of $25 per $100 borrowed, regardless of whether you repay your loan in four days or in 31 days.

If you on the other hand have a credit card, a four day long $100 loan will most likely not cost you anywhere near $25. Even if you do not have a credit card that offers interest free 50 day periods, you may still have a credit card where you can borrow $100 and only pay interest for those four days. Even with a really high monthly interest rate, it won’t amount to much for a four-day period.

When you do not known exactly how much money you will need

When you take out a traditional payday loan, you will normally have to decide right then and there how much you want to borrow until your next payday. Some lenders will not allow you to return later to borrow more before your next payday, and the ones that will allow this will typically charge you a new fixed-fee which make multiple borrowing extremely expensive.

payday loanBecause of this, many borrowers are tempted to borrow more than what they think they will actually need. They are already paying a high fixed fee for their payday loan, so they want to “get the most out of it”. Also, they want to safeguard themselves against having to pay an additional fixed-fee if the run into any unforeseen emergency and need more money than expected before the next payday.

The problem with over-borrowing is of course that it can be tempting to spend your money once you have it in your pocket. You also run the risk of your money being stolen or lost, or that friends or relatives will pester you for money if they get a glimpse of the “extra cash” you have at hand.

When you purchase something an pay with your credit card, there is no over-borrowing. If you need to make a new purchase later in the week, there is no new huge fixed-fee to pay. This way, a credit card gives you more flexibility and you do not have to keep extra borrowed cash around ‘just in case’.

There are of course plenty of examples of people that go crazy and overspend with their credit card as well, but for many consumers it is more difficult not to overspend when they have cash burning a hole in their pocket than when its just a credit card. Which group, if any, do you belong to?

When you need repayment flexibility

A payday loan should be repaid on the day you receive your next pay. That is the basic idea of a payday loan. Many traditional payday lenders will even make you sign a post-dated check as collateral, so that they can cash the check if you do not show up to repay the loan when it is due. If you fail to pay back the loan on your payday, and have an empty check account, the bank will charge you an overdraft fee when the payday loan company cashes your check.

If you on the other hand have a standard credit card, you will most likely have have the option of doing a minimum payment this month and then pay the rest of the loan back the following month, or make a minimum payment the next month as well and continue to push the loan. This is of course not a comfortable situation to be in, but it may be better than ending up in a downward spiral where so much money from you next paycheck will go to repaying your current payday loan that you will be forced to take out a new payday loan to pay rent and groceries.

Since payday loans tend to be so expensive, it is often better to use a credit card for your emergency and then slowly pay off that loan over several months. As long as you make at least the minimal payment each month, you shouldn’t incur any hefty fees but you will need to pay interest.

short term loanExample 1: You borrowed $100 on your credit card. That is $1,52 in monthly interest on a credit card charging 19,9%. This month, you will pay back a part of your loan (not the full loan) plus $1,52 in interest rate. Also, as your loan decreases with each payment, so will the monthly interest payments.

Example 2: You borrowed $100 in the form of a payday loan, when there was 20 days left to your next payday. On your payday, you must pay the full $100 back + interest and fees. It is not unusual for payday lenders to charge $25 in fixed fee for a loan like this, so even if don’t pay much in interest for a mere 20 days you will most likely end up paying back at least $27 in fee + interest.

Of course, it is ALWAYS important to check the exact terms and conditions of your specific credit card and of several payday loan companies before you decide which option that is best for you. Also keep in mind that for some people, paying back a payday loan once and for all is easier than properly managing a credit card where you have more flexibility.

When you want extra consumer protection

Many credit cards will offer extra consumer protection. You may for instance get travel insurance when you purchase a trip using your credit card, or fraud insurance when you order a product online. Of course, if you need to take out a payday loan to buy milk, bread and beans than the consumer protection offered may be of little use to you. But there are those rare situatios when purchasing airline tickets on credit or ordering a spare part for your space heater on credit actually make sense, and in those situations it can be a really good idea to use a credit card that offers you extra consumer protection instead of using a payday loan to pay for the emergency purchase.

If you live in the United States, more information can be found in Section 75 of the Consumer Credit Act.

Invest your money, dont gamble it on longshots

stop gamblingIt is often said that the secret to becoming rich is easy. Spend less than you earn. It is hard to argue with the logic off that statement but it is still only a small part of financial success. Another equally important part of financial success is to never gamble with your money. You should think about investing as a game of poker where you make strategic investment that is likely to give a good return and that give you a good value in comparison to the risk you take. You should never gamble and bet your money on high risk investment where a large element of luck is needed for you to see a return on your investment. Investing should be skilled based like poker, never luck based like casino games such as roulette and slot machines. The promise of easy money and large jackpots entice a lot of people to casinos all over the world. But is is important to remember that casinos make huge profits and that most people leave the casino poorer then when they came in. It does not matter how big the potential pay day is if the chance of getting it is too small.

Gamble or investment

poker investmentsIt can sometimes be hard to know what is to be considered a good investment and what is to be considered gambling. A simply rule on thumb is that if an opportunity seems to good to be true it is likely a long shot gamble. If you know that you like very high risk investments and to dream about their returns it can be a good idea to set a limit for how much you are allowed to invest/gamble on this type of investments. Extreme high risk investments can be an interesting spice in a portfolio but should be kept small enough that the negative effect caused of them failing is minimal. I recommend that you never invest more than 1% of your portfolio in high risk investments.

How to stop gambling and start investing

The key to stop gambling with your money is to start looking on your investment over a longer time span. By focusing on your long term success you will not be as tempted to gamble and take large risks in the hope of getting rich quick. Focusing on your long term success makes you more likely to succeed.

invest dont gambleA common problem among poker players is that they are more focused on winning money then they are on avoiding loosing money. The allure of profits is bigger than the fear of loosing money. To become a successful poker player they have to learn that a saved GBP is worth just as much as a GBP that they won. As an investor you have to learn the same lesson. Avoiding losses is just as important for long time success as it is to earn money. This is just one of the many lessons poker can teach you as an investor and that can help you stop gambling and start investing.

Another important lesson that you can learn from poker is risk management and risk assessment. If you want to be successful as a poker player you have to know how to assess risk and be able to judge whether the potential pay day is worth the risk. As an investor you will need to asses the risk of investments the same way. Only when they pay out is bigger than the risk should you ever devote to a pot or an investment. Assessing risk is easier when you play poker than it is when you invest but the basic principles remain the same.

It is important to remember that you can play more poker hands in a single night than you might make investments in a year. That means that the law of averages will have a large effect when you play poker than when you invest. In poker you know that if the risk assessed value of a hand  is bigger than the investment required to stay in the hand you should stay in it and you can feel certain to win money over time. When you invest on the other hand every individual outcome will have a larger impact on your overall success since you repeat the action with lower frequency. As an investor this means that you need to be more risk averse than a poker player has to be. As an investor it doesn’t matter how big the potential profit is if the risk is too big.

earn money with penny stocksPoker is not a perfect metaphor for investing and the financial world but in many ways it remains a good distillation of the essence of finance. I therefore recommend that everyone who wants to become a good investor spend some time at the poker tables. There are many lessons to be learned that will make you a better investor and help you in your life in general. You do not need to play for high stakes. The lessons can be learned on any level. If you prove to be a successful poker player you might want to devote more money to it. If you find poker hard you can keep playing at lower levels to learn the lessons without loosing too much money. Good luck.