CAP’s thoughts on the Woolard Review: What’s the future of DRO funding?
Imagine losing your job, having a child to care for, a house to run… and being terrified because you are being contacted by enforcement agents about your rising debt. You reach out to get help from debt advisors but are told that to go insolvent you need to pay money that you don’t have. This is where Joanne found herself after contacting CAP for help with her debt. Under the new Debt Relief Orders (DRO) criteria, she would have been eligible for a DRO to help clear her debt, however, with no savings or excess income £90 would still be hard to find.
It is predicted that one consequence of the COVID-19 pandemic will be an increase in the number of people requiring help with problem debt. The government has provided support to many people including through mortgage holidays, furlough, self-employed help, etc. But by the end of 2021, the demand for debt advice is forecast to increase by up to 60%. This increase in the number of people needing debt advice is ‘likely to last for many years creating additional pressure on the sector’s funding and structure.’
After recent changes, DROs in England and Wales are now more accessible to people seeking a way out of debt. But the £90 cost of a DRO presents an ongoing challenge that limits take-up of the solution and has been identified in the Woolard Review as ‘unfair’. The review stated that ‘fees for Debt Relief Orders (DRO) should not prevent the poorest in society accessing the help they need.’ So what are the alternative options for funding?
What is a DRO?
A DRO is one way of dealing with your debts if you owe less than £30,000, do not own your own home or have other assets worth more than £2,000, and have less than £75 left over after paying your basic household expenses each month.
DROs are an alternative to the much more expensive path of bankruptcy (costing the applicant £90 rather than £680) but they still are a type of insolvency and so negatively affect the applicant’s credit rating.
What is the problem with the DRO fee?
In comparison to bankruptcy, the cost of a DRO can sound relatively small. However, at CAP we know that 37% of our clients are sacrificing meals because of debt and 87% have no savings to draw on. Like Joanne, many clients are struggling precisely because they have no disposable income and so finding that £90 is too often impossible.
For those people who need to access debt advice and then insolvency, finding these fees may also be more difficult after the pandemic. The impact of the pandemic on personal finances means that many people will be coming out of the pandemic with significantly fewer savings than they went into it with. The Money Advice Trust also recently said that the impacts of the pandemic ‘will make finding the money to pay for an insolvency fee even more difficult than before.’
This is known to be a widespread issue with this debt solution, with the Woolard Review highlighting that it is ‘unfair when the very poorest are asked to provide £90 for a DRO application.’
Why is there a fee for DROs?
DROs were created to be cost-neutral; the fee paid by applicants covers the costs of administering this debt relief option. So any reduction in the fees collected for DROs leaves the question of how the provision of DROs can be alternatively funded.
Currently, there are approximately 30,000 DROs granted a year. Of the £90 paid by applicants, £80 goes to the Insolvency Service. After the recent changes to the DRO criteria, there will be an estimated increase in DROs to approximately 43,200 a year. Therefore approx £3.5 million is paid to the insolvency service each year. This does sound like a large sum but is small when compared to the insolvency service’s annual budget of £129.5 million 2020–21.
There are several ways any gap in funding could be met, including a levy on financial services, cross-subsidisation across insolvency solutions/applications, government funding. Each would bring its own complications and challenges but additional funding will be required if there is any reduction to the funds raised from DROs
What are the different options for reducing or removing the fee?
There are a number of different options including:
- No fee for all applicants.
Another option would be for the fee to be waived for all applicants — removing the cost element to them entirely. This would mean that any applicants who are eligible for a DRO would be able to access this insolvency solution.
2. A reduced fee
Another way that the DRO fee could be changed would be to reduce the fee so that it is more manageable for applicants e.g. £50. In the Scottish equivalent of a DRO a reduced fee of £50 is combined with no fee for those on certain benefits.
3. An advisor assessed grant.
One option proposed in the Woolard Review is for a central fund, from which those who cannot afford the fee have the cost covered. It is not clear who the gatekeeper of this would be, but it has been proposed that advisors would be in the best position to identify who requires a grant.
4. Waiving the fee for those on certain benefits.
Another way that the system could be reshaped could be if the DRO fee was waived for clients who already receive certain income-based benefits. This is one option proposed by the Money Advice Trust and has also been actioned in Scotland’s equivalent to a DRO (the Minimal Asset Process Bankruptcy).
The future of the fee
There is an urgent need to rethink the fees for DROs to ensure that this insolvency route is accessible to those who most need it, those like Joanne. With robust funding and careful consideration of the options, the DRO can play its designed role in the insolvency landscape.
How we remove the DRO fee barrier is one question. The other is — are we willing to give this the priority it needs?
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