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.
Contents
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?
You have no realistic prospect of paying your debts so you need a form of insolvency – but a DRO, IVA or bankruptcy?
- 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.
Jenny Crossley says
It will be fantastic if the DRO limits are lifted as it will make it easier for more people to apply for them, particularly if they have an asset like a car that is valued at over £1000 or are due additional income increase as they will be getting LCWRA element of UC, for example. It reduces the risk of the DRO being revoked or not submitted as the surplus income is slightly too high or their debts are just over £20,000.
Clare says
Does this mean that if we’re currently paying £100 a month to an IVA with debts of £27000 we may be eligible for DRO if changes approved?
Sara (Debt Camel) says
possibly! How far into your IVA are you? And is £100 a month really affordable for you?
Clare says
Hi Sara, thanks for your reply, first time I’ve been brave enough to comment! We’re 15 months in, it’s tighter some months than others. I wish I could say we’re spending less during the pandemic but with children now at home 24/7 we’re actually spending more, especially on utilities.
Sara (Debt Camel) says
You should ask your IVA firm if your payments can be reduced because of this extra expenditure. Even £15 a month would be helpful.
The Insolvency Service is talking about making the DRO changes “in the spring” so you could come back in a few months and see if they have been broaught in and what exactly they are.
Clare says
Many thanks Sara, I will email Stepchange and keep my eye on changes in the spring. Kind regards, Clare.
Dean Russell says
Hi Clare, i assume your IVA will run for 6 years meaning you have around 3-4 years remaining?
I am also assuming that if you are looking at the option of a DRO then you do not have any assets to protect? and most if not all of your creditors are non priority
Under the new rules you are allowed £100 per month disposable income, you will have to maximise what is known as trigger figures if you were to go down the DRO route. The reason being that you can include 2021/22 Council Tax bill in the DRO the same as your water bill. However you have to not pay both and wait until they call in the whole amount, for CT it is when they issue you with a Liability Order.
Also if you are to go down the DRO route you will have to stop the IVA payments and obtain a letter confirming your IVA has been cancelled.
Before you do any on this you will have to do a watertight income and expenditure and maximise the Trigger figures, your local Citizens Advice will be able to help you with this
Stephanie Bryan says
Its a shame there is no provision of help for whom bancruptcy is the only option but cannot afford the high cost.
Sara (Debt Camel) says
Indeed. Why is a DRO not suitable for you – is it the amount of your debts? Or what?
Stephanie Bryan says
I did go down the route of a dro which was granted however it was revoked there is a property abroad(Greece) which I had assumed was in the name of my ex husband only instead it appears he has now transferred into my name. This I know will still be an issue for bankruptcy although the property is probably valued at no more than €20,000.
It is not just myself affected if I wanted to go down the bankcruptcy route, I am sure there are very many who are unable to because of cost although raising the dro level will be a big help to many also which is brilliant.
darren says
have debt of around £16000 and approx nothing left after bills and my iva at £50 a month but have a car i pay £200 a month as i need a reliable car for work and its a high APR with wages of £22000 a year would i be able yo apply for a dro without losing the car ? its value is £8000 with finance balance of £9000
Sara (Debt Camel) says
Talk to National Debtline on 0808 808 4000 about whether you have any better options to this IVA.
Issy says
Hi , I’m currently on an IVA , my debts were only £10,000 but I was advised a DRO, when these new rules come into place can I go on a DOR , bern in my IVA nearly 3 years , would ov saved me all the feees I wasn’t told about too !!
Sara (Debt Camel) says
how much are you paying a month to your IVA? Is this a struggle?
Do you have a house? or a car?
roger wallis says
I 100% agree with the new proposals, my issue is that lead generators will use any means possible to still sell IVAs, I have seen fraudulent documents to assist individuals to get IVAs. Whist Insolvency practices are allowed to give commissions this awful practice will carry on against the most vulnerable of people
Harry says
Absolutely. I have had experience in dealing with this. One company wanting to fraudulently say my income was larger than it was so I could go for an IVA and another who refused to accept my reasons for not going with them which were that my benefits were due to go down (and therefore my income overall) within 18 months. This meant that the IVA would have failed, but he was trying every possible tact to say that wouldn’t happen!!
Dean Russell says
I have a complaint with the FOS. The company missold IVA when a DRO was the best option all day long. However they made a mistake they said that client signed the form going through the options, they didnt and the form was so old it was laughable, the form stated the DRO limit was 15K, however the DRO Limited had increased to 20K when client signed, just hope the FOS sees this and refunds the payments
Chris Bone says
Probably goes hand in hand with suggestion 3) above and the increased surplus income, but reducing the moratorium period to say 6 months would be useful, an additional trigger to incentivise people to seek work without thinking they may be snookered for 12 months post DRO approval.
Also to make the process a little more speedy and seamless for intermediaries, abolish the need for financial assessment for applicants on means tested benefits, similar to the principle of no Income Payment Arrangements for bankrupt people in receipt of state benefits.
Dean Russell says
Work should not be an issues unless the claimant lives with parents, if they are renting they will have to pay more in rent, council tax, travel, would they not
Sara (Debt Camel) says
yes people often are OK, but changing it from £50 to £100 makes this less fraught.
Sidhu says
Hello, I currently have debts of around £28500 loans credit cards at the moment am on payment freeze only on benefits disability and pip no other income I rent from a private landlord so have to put money in just about cover basic food and bills really struggling have no car assets etc.
Would I qualify for a DRO and would they ask why I got into so much debt when I knew I had no income?
I am renting with my daughter she lost her job and everything went from bad to worse prior to that I paid regular. Now can’t afford anything am thinking to move to 1 bed on my own.
My question is will my pip be included in my income as I need that due to my health problems with which I get my health essentials on daily basis I have regular women’s issues and need incontinence pads clothes and have to do a lot of washing plus cannot go out on own so need to pay cabs etc I’m worried they’ll take these into acct and say I don’t qualify.
As when I move out on my own and I start getting Severe disability payment SDP will that be included? Please advise
Regards
Sara (Debt Camel) says
This is complicated:
1) your debts are currently over the 20,000 DRO limit. As the article above says, this may be increased to 30,000 in May but that isn’t definite yet.
2) is interest being added to your debts? That could take you over the 30,000 point. Are any of your debts high interest debts?
3) You are planning on moving soon. It may be better to wait until you have moved before applying for a DRO as any form of insolvency can make it hard to get a private tenancy. And your benefits and expenses will be changing.
But in general PIP isn’t a problem for a DRO as although it is counted as income, you are also allowed the same amount as “adult care costs”. So it cancels out.
I suggest you talk to your local Citizens Advice about a DRO, benefits and your housing situation.
Roger D Wallis says
Sara is completely right, if you wait till May you could go above the threshold, I would save what you can and make yourself bankrupt
Dean Russell says
Although I think this is a very good update of a DRO, however there is still one issue that has to be resolved, that is every debt has to be individually included into a DRO and there is too much emphasis on the Intermediary to ensure they have all the debts. It should be the clients responsibility to ensure they have provided all debts to be included. Not all debts are contained in Credit Reports.
Trevor says
My Dad is paying for a car that I use, on higher purchase. The car is worth much more than the current £1000 or the proposed £1500. Although my Mum’s name is on the purchase documents as the owner, I pay the road tax as the registered keeper. Will the car my dad is paying for get taken away if I went for a DRO? (Or bankruptcy?)
Sara (Debt Camel) says
The car is worth much more than the current £1000 or the proposed £1500.
to be clear, the Insolvency Service is not proposing to increase the value of the car allowed at all.
The registered keeper of a car is not always the owner of the car. Here the owner is legally the HP company, it is not your car. So you should not be rejected for a DRO because of this.
As your dad is making the HP payments, that is irrelevant for your DRO.
The DRO adviser will need to consider whether you need a car – if you do, you will be allowed to count the road tax as an allowable expense.
So I suggest talking to a debt adviser about a DRO and they will go through all the criteria and whether you have any better options. Phone National Debtline on 0808 808 4000.
Trevor says
This is much appreciated.
Martin says
How does overdraft affect disposable income? What if after paying all the bills person is still in red (again using overdraft) does it mean his/her DI is =0?
Sara (Debt Camel) says
Disposable income starts from assuming you don’t have any debts. That includes the overdraft which will be just another debt in your DRO. Then it looks at your income and your expenses – bills and living expenses but no debt repayments as your debts will have gone.
Martin says
So currently, if you earn £101 (£51?) more than your regular bills (phone, rent, council tax, etc) – you do not qualify for the DRO? Looks like I will have to force myself to quit the job to be unemployed for a few months, and to deliberately default on everything …
Sara (Debt Camel) says
Can I suggest you talk to a good adviser? There may be items you have not included in your regular expenses which you are allowed to. Phone National Debtline on 0808 808 4000
NatalieC says
I recently applied for a DRO (last Thursday they submitted it) and I’m waiting anxiously.. I’m still not on the insolvency register, does anyone know usually how long this takes?
Thanks
Weatherman says
Hi Natalie
As a rule of thumb a decision on your application is usually made within about 10 working days (2 weeks). Hang tight!
Miss Edan says
Any news of the new proposed DRO changes?
Weatherman says
Hi Miss Edan
Not yet! The consultation’s closed, but they’re still considering responses. Given that their suggested starting date was May, I would hope we’ll hear something soon…
AnnaA says
Is there any company that would do a DRO for someone that has moved abroad? the companies I called on the national debt line website list have said they dont do it if I dont plan on moving back to the UK.
Sara (Debt Camel) says
I don’t know of one.
dave says
Any news on DRO changes yet
Cheers
Sara (Debt Camel) says
not yet!
Kelly says
Hi Sara I’m in year 2an half of my Iva , I didn’t get an option in the beginning my debts were £10,000 I rent my home , with the new rules concerning DRO , will I be able to cancel the Iva at present I’ve paid about 9500 ?
roger wallis says
Hi Kelly. The simple answer is yes but you must only be able to afford less than £50.00 ! Month and have assets of less than £1000.00.
If that is the case it is obvious your circumstances have changed. If that is the case it maybe wise to ask your insolvency practitioner to propose a paid to date proposal
Sara (Debt Camel) says
Roger,
a) you seem to have missed that new DRO rules are being proposed, which is what Kelly is asking about.
b) in any case, many people have been missold IVAs and would have qualified for a DRO under the current DRO criteria. The fact your IVA thinks you can afford £85 a month does not mean that a DRO adviser will think you have spare income of more than £50…
Sara (Debt Camel) says
Hi Kelly,
paying in 9500 in two and a half years is a lot – it suggests you have been paying over £300 a month. Is that correct?
has your situation now changed so you can afford much less?
Weatherman says
Hi Kelly
If the new rules come in as we expect, you could get a DRO as long as your total debts are under £30,000, your disposable income per month is under £100 (as worked out by a specialist adviser called a DRO intermediary, not the IVA firm), you don’t have a vehicle worth more than £1,000, and you don’t have any other assets over £1,000.
You’re able to cancel an IVA and start a DRO – see here (not about the new rules, but still applies): https://debtcamel.co.uk/end-iva-change-to-dro/