Insolvency Service DRO consultation — the changes we need for a fresh start for people in debt
Many people look to a new year for the promise of a fresh start. That’s why at Christians Against Poverty (CAP) in January we see a spike in the number of people coming forward for debt help as people resolve to make this year a better one. 2021 might not have got off to the best start but there have been some fresh shoots of hope for people in debt.
On 12 January 2021 the Insolvency Service’s Debt Relief Order (DRO) consultation proposed changes that could be in place as early as May 2021.
Changes to the DRO scheme have been high on our wishlist at CAP for a while. 59% of the people receiving CAP Debt Help have no way to repay and rely on insolvency solutions. DROs were created to provide a fresh start for people with very low incomes and no assets, who cannot afford bankruptcy or IVA fees, and who have no funds to offer creditors through these processes.
CAP is one of twelve competent authorities who provide DROs in England and Wales. From experience we know that the DRO provides a fresh start for people who have no other route forward — not only because the fee is nearly £600 cheaper than bankruptcy, but because it is more proportionate and timely.
It is estimated that 15,500 additional people will be helped out of debt by these changes in 2021/22.
It is good news that the proposed changes will allow more people access to a DRO by changing the strict monetary eligibility criteria. The amount of surplus income and assets applicants are allowed will double from £50 per month to £100 per month, and from £1,000 to £2,000 respectively. The amount of debt someone is allowed to owe is also proposed to rise from £20,000 to £30,000.
The Insolvency Service’s DRO consultation links the importance of these changes to the worrying economic outlook as a result of the coronavirus pandemic. It is expected that three million more people than before the pandemic will need help with problem debts by 2022.
Even before the pandemic we were seeing a worrying number of people shifted into bankruptcy and unable to afford the fees, despite being the target group for the DRO.
It is vital that the debt advice sector has the right tools to help people enter an appropriate debt solution after advice, and the type of changes proposed by the Insolvency Service’s DRO consultation are overdue.
We think the changes need to go further, here’s why:
1. The debt limit is the biggest roadblock that stops people who need a DRO from accessing debt relief, and an increase to £30,000 will not be enough.
As it stands the proposals will see the DRO opened up to people on higher incomes without first making sure that those on the lowest incomes, but with higher debts, have access to it. This does not seem right as it excludes people who are least able to afford an alternative option. The debt limit is an arbitrary cliff edge — and five years ago when there were calls for it to be raised many in the sector advocated for £30,000. Six years later, levels of household debt and the costs faced by low income households such as rent and council tax, have continued to rise. CAP helps many people who owe more than £30,000 of debt but have no means to repay — the proposed change will not ensure they have a proportionate option available to them.
2. It is the vehicle value threshold, rather than the asset limit, which leaves people without a solution but there is no proposal to change this.
For the most part, our low income clients do not have assets in excess of £1,000, but it is difficult to find a reliable car within the current threshold. Mobility cars and scooters are also not exempt from these limits and often exceed them. This particularly affects people with disabilities, lone parents needing to do school drop-offs, and people who need a reliable car to commute to work. Clients worry about the ongoing cost of repair bills for a car worth under £1,000 and this can deter them from entering any solution. An increase in the vehicle value threshold to £2,000, in line with that proposed for other assets, is a must.
3. We must also bring DROs in line with bankruptcy so that all debts, and not just those listed on the application form, are discharged.
It is awful when a debt that existed before the DRO but was not known about at the point of application comes to light. Whereas it would be covered by a bankruptcy, in a DRO only the debts listed on the application are discharged. This means people on the lowest incomes are expected to repay debts that people in another solution would have had forgiven. It is difficult to ascertain a definitive list of debts at the point of application — clients may not have all the details to hand for debts from a challenging period in their life, credit reports do not provide a complete record of all debts, and often government authorities are slow to notify clients of historic debts they owe. Where an additional pre-existing debt would not breach the debt limit there should be a facility to add it to the DRO. Without this change DROs will continue to risk being ineffective, and leave people with debts to repay that should have been cleared.
CAP will be responding to the Insolvency Service’s DRO consultation and we also plan to publish our evidence of the impact of further changes early in February. To see the latest from us on this topic and more make sure to follow this blog and sign up to our mailing list to receive updates straight to your inbox.
