Income and expense limits for a debt relief order
When a debtor applies for a debt relief order, their income and regular expenses are assessed by an authorised intermediary.
Income rules for a debt relief order
To qualify for a debt relief order, the debtor's surplus income after their essential expenditure must not exceed £75 per month.[1]
The debtor must disclose all the income they receive from:[2]
employment
self-employment
benefits
pensions and insurance
contributions from the household
There is no upper limit on the amount of income a debtor can have and still qualify for a debt relief order. The debtor's net income, after their expenses have been deducted, is the figure that is counted.
Some items of expenditure are not counted towards the total. Only allowable expenses can be deducted from the income figure to reach a surplus income figure.
Joint and household income and expenses
When they provide figures for their financial statement, debtors who live in couples or households with other people might find it difficult to split out their income and living costs from the people they live with.
The debtor's income includes contributions they receive from a member of their family to meet the reasonable domestic needs of the debtor and their family.[3]
Guidance to Citizens Advice debt advisers[4] states that the debtor can include either:
half of the total household income, and half of the expenditure
an amount that reflects the contribution made by the household to the total income
The debtor can include the proportion they pay on their financial statement, if some items of expenditure are paid jointly with another person.
Income that varies each month
The debtor must state on their application the circumstances as they stand at the date of the application.[5]
The debtor must notify the Official Receiver if there is an increase in their income during the moratorium period.[6] This can cause particular problems for people who are self employed, especially if they also claim Universal Credit.
Reporting fluctuating income
The debtor can provide an average of their income and expenditure over a reasonable period. DRO guidance to intermediaries suggests that the debtor provides at least three months' earnings.[7]
The Official Receiver has previously stated that annual net profits can be divided by 12 to reach a monthly figure.[8]
Benefits for care and mobility needs
Most payments from benefits are classed as income in a DRO application. Income from certain benefits that are paid to cover the additional costs of living with a disability can be offset against those costs.
This means the DRO intermediary includes the amount of the regular payment in the application. They also include the same amount as an expense, under a heading like adult care costs.
The benefits that can be offset against care and mobility costs are:[9]
Personal Independence Payment (PIP)
Disability Living Allowance (DLA)
Attendance Allowance (AA)
certain benefits under Industrial Injuries and War Pensions schemes
Elements for limited capability for work and work-related activity in universal credit are not offset against care costs unless the debtor can show evidence.
More information about benefits and income is available in the DRO A-Z guidance for debt advisers.
Allowable expenses
The DRO intermediary deducts the debtor's allowable expenses from their total income.
Allowable expenses are the payments that are necessary for the domestic needs of the household.
Some payments could be considered too high to be an allowable expense. The debtor might also pay for things that the Insolvency Service does not think are necessary to meet a basic need.
The DRO application form contains fields for the most common expenses, such as:
housing costs
travel expenses
food and housekeeping
energy and water bills
utilities, like TV and broadband
Some expenses are for a fixed monthly amount. For other bills like energy and utilities, the debtor receives a bill, so it is straightforward to check how much the payments are.
Regular expenses like food, housekeeping, and travel can be hard to calculate. A bank statement could help the debtor to work out how much they spend. The DRO intermediary will speak to the debtor about amounts for allowable expenses that they think are too low or too high.
Expenses that are not allowable
Some payments the debtor makes are not an allowable expense. This does not mean the debtor cannot pay them at all. It means they are not deducted from the total income to reach a net income figure.
The maximum income figure after all the allowable expenses are deducted is £75 per month. Large payments that are not an allowable expense could mean a debtor does not qualify for a DRO, even if they have little or no income spare.
The debtor can fund expenses that are not allowable from their surplus income of up to £75 per month.
Expenditure on hire purchase agreements
Hire purchase and conditional sale agreements allow a debtor to use the goods they are in the process of buying. The creditor is the owner of the goods. The debtor owns the goods once they have made the final payment under the credit agreement.
The debtor can choose to exclude the hire purchase agreement from the DRO if the agreement is not in arrears and either:
a third party is making the repayments on their behalf
the repayments are an allowable expense
Repayments towards items that would usually be disregarded under the Insolvency Rules 2016 because they meet a basic domestic need are an allowable expense.
The DRO A-Z contains more information about repayments towards hire purchase agreements as an allowable expense.
Vehicle exceeds asset limit
The repayments on a vehicle worth more than £2,000 could be an allowable expense in exceptional circumstances. This is at the discretion of the Official Receiver. The DRO intermediary sends more information to the Insolvency Service when they submit the application. They must explain:
when the agreement was taken out
whether the agreement reduced the debtor's available income
whether public transport is available
whether payments under the agreement are less than the cost of public transport
Third party can make payments
Another person in the household could be willing to take over the payments under the agreement. This means the payments do not have to be declared on the application form.
Agreement ends during DRO moratorium
Once the agreement ends, the goods or vehicle become the property of the debtor. Depending on the value of the items and whether they are exempt, the debtor could cease to be eligible for a DRO during the moratorium, leading to a risk the Insolvency Service will revoke the DRO.
The debtor must tell their DRO intermediary if a hire purchase or conditional sale agreement will end during the DRO moratorium period.
Deficit budgets
The debtor's expenses might exceed their income. Debt advisers call this a deficit budget.
The debtor's DRO application must state the particulars of the expenditure they claim are necessary to meet the reasonable domestic needs of them and their family.[10] Necessary expenditure could be higher than that the debtor is currently spending, for example, if they have resorted to using foodbanks, or otherwise failing to meet the reasonable needs of their household.
A deficit budget in the debtor's application does not prevent the Insolvency Service from approving the DRO. If the debtor is waiting for an increase in income, for example from a claim for benefits, they should include the expenditure they think will meet their reasonable needs and the needs of their family when the additional income is available.[11]
Last updated: 20 May 2022