In August 2014, the Insolvency Service issued a Consultation on Debt Relief Orders (DROs) and Bankruptcy petition limits. I think there are a lot of problems with the personal insolvency regime in England and Wales (see my article last week about the recent insolvency statistics) and so this consultation provides a welcome opportunity for the Insolvency Service to get industry responses on many issues.
The Insolvency Service is asking about the DRO limits and whether these are correct; how well the administration/approval process is working; and the debtor experience of DROs. Here are I am going to look at what seem to me to be the most important questions they are asking
*** Update: in January 2015 the Insolvency Service announced the maximum debt will increase to £20,000 and assets to £1,000 – see Debt Relief Order limits to increase – good news!
Q2 What level do you think the maximum debt amount should be set to?
I think this should be increased significantly. R3 have proposed £30,000 as the limit and I agree with this.
There is no point in forcing debtors who have minimal assets and minimal spare income through bankruptcy, which is more expensive for them and for the Insolvency Service to administer. If someone has income that is entirely derived from benefits or low surplus income , there would be no IPA under bankruptcy, so the aim should be to ensure that as many of these people as possible are dealt with through the DRO route.
DROs are on the public Insolvency Register, there are the DRRO provisions and insolvency remains on a debtor’s credit record for six years. I think this is a sufficient deterrent against reckless behaviour. I don’t think raising the current £15,000 limit to £30,000 would have any adverse effects in this area.
Q4 What level do you think the maximum asset amount should be set at?
There are two problems with the current maximum asset level of £300:
- it fails to recognise the reality that most people in Britain have one or more computers/smart-phones/tablets. These are a part of everyday life, not a luxury. They are especially needed by those people who are actively job searching and others who are claiming benefits – two of the classes of people who would often otherwise qualify for a DRO;
- it leads to debtors incorrectly ruling out a DRO because they assume their possession are worth more than £300, even if they wouldn’t be after items are excluded and second-hand values are used for the rest.
I suggest that the MAP limits that will apply in Scotland should be adopted for DROs: “Asset Limit – £2,000 (for relevant assets – no single asset >£1,000)”
(I also think that a similar approach should be adopted for personal possessions in bankruptcy. In general the types of insolvency should adopt similar approaches unless there are good reasons to diverge.)
Q5 What level do you think the surplus income amount should be set at?
I think £50 is appropriate.
(I also think the minimum level for setting an IPA in bankruptcy should be changed to be £50 rather than the current £20 + £10 per family member for emergencies. Collecting small amounts of money from people who have little is not cost-effective for the Insolvency Service. The need for an emergency fund is not really related to the size of the household so a flat amount would be simpler and more sensible.)
Q6 Do you think additional costs of the competent authorities should be
covered by the application fee?
No. The whole point about DROs is that they are a debt solution for people with no assets and no spare income. If DRO fees are raised, debt advice agencies will have the additional burden of helping clients apply for charitable aid with them.
(Although it is not within the scope of this consultation, I also think that bankruptcy fees should be cut. At the moment there is the absurd situation where people are opting for IVAs because they cannot afford the bankruptcy fees. This distorts the personal insolvency system and should be tackled as a matter of urgency.)
Q10 Are debtors who are suitable for DROs aware of their existence?
In too many cases they are not. In my personal experience giving face-to-face debt advice as a CAB advisor, all clients have heard of bankruptcy, many have heard of debt management plans and IVAs but very few, probably much less than 20%, have heard of DROs.
The recent growth in low value IVAs contains at least some and possibly rather a large number of debtors who would have qualified for a DRO but were not aware of this. IVAs are heavily advertised, DROs are not. Clients who contact an IP or a lead generating company may sometimes not have the DRO option explained to them properly, for various reasons:
- it is not in the commercial interest of the IP that clients should choose a DRO. Some IPs give excellent and impartial debt advice that is in the best interests of their clients, but others don’t;
- many IPs do not mention DROs at all on their websites. They list bankruptcy and IVAs as an alternative, but DROs are either omitted completely or mentioned in small print on a hard to find page;
- unregulated lead-generating web-sites are especially bad about this. As a result clients think they have discussed their debts with a good debt advisor and have been assessed as being most suitable for an IVA, whereas they have actually spoken to someone with little or no experience of debt advice at all;
- many IPs use expenditure guidelines for an IVA which are stricter than the Common Financial Statement. As a result an IVA for £70 or £100 a month can be proposed for a client who would have met the DRO £50 maximum income. As many IPs do not have an Authorised Intermediary on their staff, it is possible that some of the IPs don’t realise this;
- there is a particular problem with people who are entering an IVA whose only income consists of state benefits. If this includes disability benefits, the “income” can seem to be high enough to justify an IVA, but in practice insufficient expenses are being allowed for the long-term costs of living with a disability.
I think these problems need to be addressed by the Insolvency Service. I would suggest the following:
- all IP web-sites and advertisements should mention a DRO as a possible debt option at the same point and with the same emphasis that they mention bankruptcy and debt management plans. A time limit of say 12 months should be set for the appropriate systems changes to be made;
- IPs should only pay for leads from web-sites which meet similar criteria;
- any client who is renting and whose debts are less than £15,000 (or whatever the maximum limit is changed to) should be referred by an IP to an Authorised Intermediary to determine if the client meets the other DRO criteria and to have general advice on a DRO. An IP should only set up an IVA for such a client if the Authorised Intermediary says they do not meet the criteria and the IP should have to keep this note with the client’s file for regulatory purposes.
Do you consider that the DRO regime has encouraged debtors to seek debt relief at an earlier stage?
No. See my previous answer – most clients seeking debt advice are not aware of DROs at all. How could they be when there is so little publicity about them?
Q24 What would you consider an appropriate creditor petition level?
£750 is absurd. Given the fees involved in bankruptcy, very few creditor petitions for low amounts are made, but the current limit means that creditors can threaten debtors with bankruptcy. CCJs and charging orders are more appropriate ways for creditors to deal with small debts. I would suggest £5,000.
Q25 Is there any other aspect of DROs or the creditor petition limit you would like to comment on?
I think £1,000 for the exempt value of a car is too low. Although it is possible to have an older reliable car, for most people trying to purchase such a vehicle is a lottery and can lead to significant maintenance costs. Even in London with excellent public transport, the practicalities of getting young children to school and child-care often make a car essential. I would suggest that £2,000 would be more appropriate.
(I also think the same figure should be used for bankruptcy.)
Replying to the Consultation
The Insolvency Service has asked for replies by the 9th of October. You don’t have to reply to every question. The more people who reply the better, even if you just want to say that you agree with the points that someone else is making!