In January 2021 the Insolvency Services started a consultation on proposals to widen the eligibility criteria for Debt Relief Orders (DROs). It estimates these changes will mean that 15,500 more people could be eligible for a DRO each year.
DROs were introduced in 2009 as a simpler alternative to bankruptcy for people with few assets and no realistic chance of paying much towards their debts:
- no monthly payments are made and your debts are wiped out at the end of a year;
- the £90 DRO fee is much lower than the £680 bankruptcy fee which helps the people in debt;
- the Insolvency Service benefits as its costs of administering a DRO are much lower than a bankruptcy case.
Why reform is urgently needed
DROs have restrictive eligibility criteria, including several financial limits. These criteria were widened in 2015, but by the start of 2020, it was already clear that they again needed to be revised. Debt advisers were seeing clients who were failing to meet some of the DRO eligibility criteria but for whom a DRO should be the natural debt solution as they could not make realistic payments to their creditors in bankruptcy or an IVA.
The pandemic has now made this more urgent. A form of insolvency is likely to be the best option in 2021 and 2022 for thousands more people than would have needed this is a normal year.
But there are major problems with all three forms of insolvency – debt relief orders, bankruptcy and IVAs. Without changes, these problems may mean people are either unable to access the insolvency solution they need or they are mis-sold the wrong solution. Last summer I proposed a number of changes to personal insolvency to tackle this, including widening the DRO eligibility criteria.
Now the Insolvency Service has identified the expected increase in personal debt levels as a key reason for revising the DRO criteria, saying:
Given the likely increase in personal debt and the need to ensure the DRO regime continues to provide appropriate and proportionate debt relief for those that need it, we believe there is a case for changes to be made to the monetary eligibility criteria for obtaining a DRO.
It is proposed the new changes would start in May 2021 when the breathing space changes come in.
Personally, I would like to seem them in now, so the sooner the better! But as it is anticipated that publicity around the breathing space may increase the number of people seeking debt advice, that seems a logical date to aim for.
The proposed DRO changes
Three changes are being proposed by the Insolvency Service.
1) increase the maximum debt to £30,000
The total level of debt currently allowed is £20,000. This needs to be increased if only because debt levels have gone up since 2015.
But there is no good reason for trying to keep this low. If someone has debts of say £40,000 but they have no spare income and no assets, what is the point in barring them from them a DRO and making them go for bankruptcy? It costs them more as the bankruptcy fee is higher, it will often leave them in limbo for many months as they try to save that up, it wastes a debt adviser’s time trying to get the client a grant to pay the fee and it will cost the Insolvency Service more to go through the full bankruptcy process. Who has gained by this?
£30,000 will cover most of the advice clients we see, without a doubt. But the level of harm to the small number that are over this limit but who would otherwise qualify for a DRO is significant. So I suggest the limit should instead be increased to £50,000.
2) increase the value of assets to £2000 (but leave car at £1000)
The current asset limit is £1000. This is rarely a problem – not many debt advice clients have assets more than that when they start a DRO.
However, increasing the limit is a good idea for two reasons:
- often people don’t understand many household goods are excluded and that only the second-hand value that matters. They see a sofa that cost over £1000 a year ago and an old laptop and think they will be over the £1000 limit. So they may not come forward for a DRO but instead get mis-sold an IVA.
- it means fewer DROs will be revoked if someone gets a small windfall. At the moment if someone gets a lump sum is between £1000 and £1990 their DRO is usually revoked as they would not have qualified for a DRO with that much money in the bank. This is a pretty pointless procedure as that little money doesn’t mean they can repay their debts – the best advice is usually for the person to immediately go bankrupt. An increase in the basic asset level should mean the test for revocation goes up in line.
But there also needs to be an increase to the £1000 allowed for a car. This is a real and significant barrier to people choosing a DRO who would meet all the other conditions.
Many people who need DROs are in low-paid work have to own a car. For example care workers, night shift workers, people juggling work and getting children to school may find public transport impractical. And bus coverage has got worse over the last ten years in many areas.
For these workers, a car is a necessity not a luxury. And one that is worth less than £1000 is very often too unreliable and so too expensive to run. As a result, the £1000 car limit prevents people from choosing a DRO at present, leaving them with an IVA as their only possible form of insolvency, even if they cannot really afford the monthly IVA payments.
I suggest that the car limit should be increased to £3000, which is what it is in Scotland at the moment. And the rules around bankruptcy should be brought into line with this higher car value too.
3) increase the level of surplus income to £100 per month
At the moment the permitted amount of surplus income is £50. Increasing this to £100 is sensible.
Take someone on £70 a month spare income. That’s only £840 a year. If they can’t have a DRO, what are their options?
- a debt management plan will too often be very long. That isn’t good for the person with debts and it isn’t good for the economy either.
- in bankruptcy, an IPA would be imposed but all this will do is pay the Official Receiver’s fees – creditors won’t get anything.
- in an IVA almost all the £70 a month payments will be taken in the Insolvency Practitioner’s fees. And too many of these low-value IVAs end up failing, so the creditors get little or nothing.
So increasing the limit to £100 is a sensible, pragmatic move. It will enable people trapped in very long DMPs to have a DRO instead. And it will make it harder for IVAs to be mis-sold.
It will also have the very desirable effect of encouraging people out of work to take a job. At the moment too many are worried that their DRO may be revoked as even though their benefits would be reduced they could be left with more than £50 a month spare income. That is not good for them or for the economy.
Other changes that would help
The financial eligibility criteria aren’t the only problems with DROs at the moment. Here are three changes that would make a real difference to getting people who need a DRO the help they need in the next few years.
1) All debts included even if not listed
In bankruptcy, all debts are included (apart from some specific ones such as student loan) even if a debt is not listed on the bankruptcy application. But for a DRO only the listed debts are included.
Changing DROs to follow the bankruptcy model would benefit people getting a DRO as there would be no chance of them having to pay an omitted debt that later came to light despite having very little spare income. This has been happening increasingly often with benefit over-payments, which often only emerge when a universal credit application is made. And with the sorts of debts such as parking tickets which don’t show on a credit record.
Insolvency needs to be a clean start and DROs are not providing this at the moment.
Equally importantly it would benefit debt advisers as it would reduce the time taken to set up a DRO application. It would remain important to list as many debts as possible so creditors can be informed, just as debt advisers try to do with bankruptcy applications. But the need to check and recheck that one hasn’t been missed off would be a great help.
Trained DRO intermediaries are a scarce resource. With the Insolvency Service expecting that 15,000 more people a year may need a DRO under the new criteria, it is important to make the application process simpler and more efficient.
The changes that the Insolvency Service has proposed can be made by May. But changing the debts included would require amending legislation which would take longer. I don’t think this should be allowed to hold up the simple changes but the more complicated ones are still needed and should be planned for. That is why I am calling the proposed changes a good start.
2) Provide fee remission
If you have a well-paid job, the £90 DRO fee may sound eminently reasonable. But many people who need a DRO have no “disposable income” at all and £90 can be a real barrier to them getting the help they need promptly. With the breathing space will protect debtors for just 60 days. That is supposed to be enough for them to enter a suitable debt solution. This isn’t compatible with charging a fee which may take much longer to save up.
Last month the Woolard Review for the FCA said:
The FCA should discuss with the government how an emergency fund could be provided to cover the cost of the DRO application fee for people who cannot afford the fee but who would benefit from the solution. This could be delivered to the poorest clients through debt advice providers where they act as DRO administrators, as they have sufficient information to assess if an individual would have available funds to cover the fee or not. Alternatively, of course, government may wish to consider if the fee itself could be amended, waived or reduced, but like other fees is based on a cost-recovery basis.
The amount raised by these fees is tiny. If DROs increase as the Insolvency Service expects, it will raise less than £4million pounds a year.
I suggest that the cost of discussions between the FCA, the Treasury, MAPs and the Insolvency Service, then setting up and administering a fund to give relief to some selected group of clients may be more than the cost of abolishing the fee.
Waiving the fee for two years to get through the current crisis would help, while a simple longer-term solution is considered.
3) Able to have a second DRO after three years
At the moment someone has to wait six years after a DRO to have another one. I do understand why there needs to be some limit, but six years is out of touch with reality. Some of the people who have now lost their jobs will have had a DRO only a few years ago. What is the rationale to force them through the bankruptcy process instead of a second DRO? Bankruptcy is more expensive both for the client and for the Insolvency Service.
Reducing this to three years would be a reasonable compromise.
What if you will qualify for a DRO under the new rules?
So where does this leave you, if say your total debts are £25,000 at the moment? And you have no assets and little spare income after paying your bills and everyday expenses?
- if you have recently had debt advice from a good free sector debt adviser you will probably have been told you don’t qualify for a DRO and should instead go bankrupt. Which means saving up £680 in fees…
- Or an IVA firm may have said sign here to make monthly IVA payments for the next 5 years…
The Insolvency Service is proposing the new DRO limits will be live in May, so that’s not long. I think it’s pretty good odds that this will happen and on time. So it’s probably worth waiting until then and going for a DRO, rather than going bankrupt now.
But perhaps try to save up those bankruptcy fees just in case? If you have no assets, bankruptcy is probably a much better option for you than an IVA.
Responding to the consultation
The deadline to respond to the insolvency Service consultation is 26 February 2021.
I would like to encourage debt advisers to reply. Anecdotal evidence of people with a car worth more than £1000 or the time it takes many clients to save up the fee could be helpful.
The Insolvency Service has asked specific questions, see the consultation details. You can add any other points in (6) Are there any other comments you would like to make?
If you have had a DRO already, or need one now you can also respond:
- you can either email the Insolvency Service directly; or
- the Jubilee Debt Campaign has set up a simple survey to collect responses and pass them on to the Insolvency Service.