Qualifying debts in a debt relief order

To be eligible for a debt relief order, the debtor's qualifying debts must not exceed £50,000.

The debtor's qualifying debts must be included in their debt relief order application. The debtor makes no payments to any of their qualifying debts during the DRO moratorium.

Qualifying debts are usually written off at the end of the DRO moratorium period. The exception is debts that are incurred through fraud, which are recoverable when the moratorium ends.

There is no complete list of qualifying debts. Any debt that is for a liquidated sum, payable either immediately or at a certain time in future, is a qualifying debt if it is not excluded by legislation. The Insolvency Rules 2016 contain a list of all the excluded debts.[1]

Read more about contingent debts in insolvency.

Common examples of qualifying debts include:

• consumer credit agreements like credit cards, loans, and overdrafts

• energy and water arrears

• phone, broadband, and TV arrears

• money borrowed from family and friends

• council tax arrears

• court costs

Ongoing payments for services like energy and water are included if the debtor has built up arrears due to missed payments or a recalculated bill. If the payments are up to date, there is no debt to include.

For finance agreements like loans and credit cards, the whole balance is included whether the account is in arrears or not.

Written off debts

Debts that have been written off by the creditor could be left out of the DRO application if the creditor has been clear they will not recover the money in future.

Read more about written off debts in a DRO.

Excluded debts are not written off at the end of the DRO. They do not count towards the £50,000 debt limit. The debtor must continue paying excluded debts during the DRO moratorium, or the creditor could take action against them.

Excluded debts include:

• fines

• student loans

• TV licence arrears

• child maintenance arrears

• damages for injuring another person

Some excluded debts, like court fines, have serious consequences for the debtor if they do not pay. The debtor's DRO application can account for payments to excluded debts. The debtor must tell their debt adviser about all the debts they owe, even if they are not included in the DRO.

Loansharks and illegal activity

Loansharks is the name given to unlicenced illegal money lenders.

Loans from illegal lenders and debts incurred through illegal activity cannot be enforced in the courts. The courts cannot enforce a contract with an illegal purpose.[2]

The debt does not have to be included in the DRO application if it could cause a threat to the debtor or their family.

The moratorium starts once the DRO application is approved.

During the DRO moratorium, the debtor's creditors have no remedy in respect of the debt.[3] That means they are prevented from recovering the money they are owed.

The Insolvency Act 1986 states that the creditor of a qualifying debt cannot issue a bankruptcy petition against the debtor. They cannot start any action or legal proceedings without the permission of the court.[4]

Ongoing legal proceedings

Legal proceedings that have already been started against the debtor for a qualifying debt can be stayed by the court.[5] Alternatively, the court could allow the proceedings to continue. The court can impose terms on the legal proceedings as they see fit.

Secured debts

A creditor who has security for their debt can still enforce it if the debt is not paid. This includes if the debt has been included in a DRO.

Examples of secured debts include:

• bills of sale, often used to secure borrowing against the debtor's vehicle

• credit union loans, where the loan is secured against the debtor's shares

• pawnbroking agreements

Rent arrears are a qualifying debt in a DRO. They cannot be left out of the application, and the amount of arrears counts towards the debt limit.

A landlord cannot issue a court claim against a tenant for repayment of rent arrears that were included in a DRO.[6]

Landlord can get a possession order for arrears

The landlord can issue a possession claim for arrears that were included in a DRO. They cannot get a court order (including a suspended possession order) for repayment of rent arrears. They can get an outright order for possession, or a suspended possession order for payment of rent and court costs only.[7]

Landlord can get a possession order under section 21

For assured shorthold tenants, a landlord can issue a section 21 'no fault' possession claim. Tenants who do not pay their rent arrears are at an increased risk of eviction under this process.

A section 21 notice and possession claim must follow strict procedural rules. The tenant could have a defence if the right process has not been followed.

Use the section 21 validity checker to find out if a notice could be invalid.

Most types of DWP and benefit debts are qualifying debts for a DRO. This includes advance payments of universal credit, and all benefit overpayments.

Only social fund loans and crisis loans are excluded debts.[8]

The DRO A-Z on Gov.uk contains detailed information about benefit overpayments.

What happens when the DRO is approved

Deductions from the debtor's benefits for overpayments and advances of universal credit must stop when the DRO is approved.[9]

The debt is written off when the DRO moratorium ends.

Fraudulent overpayments

Fraudulent overpayments are qualifying debts. That means deductions must stop during the moratorium.

The debt is not written off when the DRO moratorium ends.[10] This means deductions can start again.

A DWP investigation into the debtor's fraud does not have to stop during the DRO moratorium

Council tax arrears are a qualifying debt for a DRO.

Council tax is calculated daily, so even if the debtor has not missed a payment the DRO intermediary can include any liability that has accrued up to the date of the application.[11]

The DRO intermediary can calculate the daily amount using the figures from the debtor's council tax bill, or ask the local authority to provide a figure.

Read more about listing council tax arrears in a DRO and when council tax arrears are a contingent debt.

Reminder notice issued by the local authority

The entire year's council tax falls due if payments are still outstanding 14 days after the local authority issues a reminder notice.[12] This means all the debtor's council tax is scheduled in the DRO application and they do not have to make any payments until the end of the current financial year (5 April).

It can be in the debtor's interest to wait until a reminder notice is issued, so they can schedule the full year's council tax. The DRO intermediary must ensure that the debtor is still within disposable income limits once their council tax payment is removed from the financial statement.

A loan that the debtor has a guarantor for is a qualifying debt. Once the DRO is approved, the creditor is likely to attempt to recover the debt from the guarantor.

Debtor is the guarantor

Guarantor debts that have been called in are qualifying debts in a DRO.

The written guarantor agreement confirms when a guarantee is called in. It is common for a guarantee to be called in when the principal debtor has missed a specified number of payments.

Guarantor agreements that are regulated by the Consumer Credit Act 1974, including most personal loans, require a creditor to send the debtor and the guarantor a default notice before they can call the guarantee in.[13] A guarantor debt is a qualifying debt when the default notice has been sent and has expired.

The guarantee is not a qualifying debt if it has not been called in. It does not count towards the total debt limit. A guarantee debt that has not been called in is not for a liquidated sum payable at a certain future time.

Read more about guarantees and contingent debts in insolvency.

The debtor might have a debt secured against their car or goods. This could be in the form of a hire purchase or conditional sale agreement, or as a bill of sale. Bills of sale are sometimes called logbook loans when they are secured on the debtor's car.

Hire purchase and conditional sale

Hire purchase and conditional sale agreements allow the debtor to purchase a car or other goods. White goods like washing machines are sometimes purchased with a hire purchase agreement.

The creditor owns the goods until the debtor makes the final payment under the agreement. The creditor has certain rights to take back the goods, subject to some restrictions such as the need to apply for a court order if the debtor has paid more than a third of the total amount under the agreement.[14]

The debtor can schedule the amount outstanding under their hire purchase or conditional sale agreement in the DRO. This means it counts towards the £50,000 debt limit. The debtor might be able to reduce the amount they owe by voluntarily terminating their agreement.[15]

Read Shelter's Specialist Debt Advice Service case study on voluntary termination of a hire purchase agreement.

Payments under the agreement are up to date

Insolvency Service guidance states that the debtor does not have to schedule the hire purchase agreement in their DRO if the payments are up to date, and the payments are either:

• paid from the debtor's disposable income

• paid by a third party

• an allowable expense

Payments are not up to date

Missed payments under the hire purchase agreement are a qualifying debt and must be scheduled in the DRO application.

The balance due under an agreement terminated by either the debtor or the creditor must be scheduled in the DRO application.

Logbook loans and bills of sale

A valid bill of sale transfers ownership of the debtor's goods to the creditor as security for a loan. It is sometimes called a chattel mortgage.

Part of the amount due under the agreement could be a qualifying debt if the value of the goods is less than the amount outstanding under the loan.

The debtor can continue making the payments under the agreement if the goods secured under the bill of sale are:

• a domestic vehicle worth less than £4,000

• items that are disregarded as assets

Check the Insolvency Service guidance for more information about bills of sale in a DRO.

The starting point is that qualifying debts should be included in a DRO application. In some circumstances, the debtor can choose to leave out a debt if the repayments are up to date.

The amount of a debt that has been omitted counts toward the £50,000 debt limit unless continued payment is necessary to maintain an essential service, for example, a phone contract.

Payments to a debt that has been omitted are an allowable expense for the disposable income criteria if it is necessary to meet a reasonable domestic need. This will always be the case where the payments are to a:

• hire purchase agreement for a car with a value of not more than £4,000

• loan for car insurance

• mobile phone airtime and handset contract

• TV, broadband, and entertainment package

Debts that the debtor incurred through fraud or fraudulent breach of trust are qualifying debts in the DRO. The DRO application does not ask the debtor whether a debt was incurred through fraud.

Fraudulent debts are not written off at the end of the DRO moratorium.[16] The creditor of a fraudulent debt can begin action to recover the debt once the moratorium ends.

Fraud is defined in law as:[17]

• false representation

• failing to disclose information

• abuse of position

The courts have interpreted a fraudulent representation as one where the maker either:[18]

• knows it to be false

• does not believe in the truth of the representation

• is reckless about the truth of the representation

Types of fraudulent debts

Common types of debts incurred through fraud include:

• benefit overpayments

• court costs for a dishonest claim

• credit agreements where the debtor provided false information

When a debt is classed as fraudulent

The debtor might have confirmation that a debt is classed as fraudulent. In other cases, it is up to the creditor whether they begin recovery action at the end of the DRO moratorium. The debtor could defend their recovery action, if they believe the creditor is mistaken.

Get specialist debt advice if a creditor is threatening to recover a debt they say has been incurred through fraud without providing proof.

Court costs for a dishonest claim

Court costs debts that are classed as having been incurred through fraud are easy to identify from the wording on the court order. The order refers to a fundamentally dishonest claim. Because a court has already made a decision, the debtor cannot argue it was not fraudulent. Their only option is to appeal the decision of the court.

Fraudulent benefit claims

Benefit regulations contain an offence of dishonest representations.[19] This offence is in addition to the definitions of fraud in the Fraud Act 2006.

A notice of a recoverable overpayment is not a decision about the debtor's fraud. For the overpayment to be classed as fraud, the debtor must have either:

• accepted an administrative penalty as an alternative to prosecution[20]

• been prosecuted for fraud

The DWP does not use formal cautions.

Credit agreements based on false information

The debtor might have provided false information to the creditor in an effort to improve their chances of getting a loan or other credit.

The creditor of an alleged fraudulent debt could issue a court claim after the DRO moratorium ends. If the debtor defends the claim saying they did not commit fraud, the court must make a decision about whether fraud has occurred.