Let’s simplify the solution to problem debt
As debt advisors, we know insolvency options are an incredibly important part of the solution to problem debt. The decision to pursue an insolvency weighs heavy, but it is the only path forward for many people in crushing debt.
It would take 58 years on average for CAP clients who need an insolvency solution to repay their debts instead — longer than their life expectancy in most cases.
For Denis, for example, insolvency was a lifeline. He experienced multiple redundancies, unexpected house moves and a mental breakdown. Over a period of 30 years his debts slowly grew and became unmanageable when his wife Penny could no longer work due to a disability. At 76, he thought he’d be in debt for the rest of his life. But with help from CAP, a Debt Relief Order (DRO) changed everything.
‘It was such a big deal for us to have the DRO granted. Before we started with CAP, we were maxed out on all the cards and the overdraft — now we’ve got no plastic, no overdraft. The bank account is always in control. But the biggest change is the fact that my wife and I talk on a daily basis. It’s given us a much stronger relationship, it’s given us control.’
We want to see more people like Denis able to access a fresh start. And that’s the topic of our latest report, Simplify the solution to problem debt.
Most people are surprised to learn that a bankruptcy costs £680 — money most people in a debt crisis do not have to spare. The Debt Relief Order (DRO) was introduced in 2009 in recognition of this, to provide a simple and inexpensive path to debt relief for those in otherwise insurmountable financial distress. Its introduction was hugely transformative for the sector and over 250,000 people have become debt free through a DRO since then.
However, due to the eligibility criteria, many people who need one are no longer eligible for a DRO. More than half (53%) of CAP clients who apply for bankruptcy are now displaced from a DRO.
These clients have a considerably lower income and fewer assets compared to the average client on a bankruptcy route. With less than £50 per month disposable income and few assets, there is no money available to cover the costs of bankruptcy investigations or to release for creditors in the process.
What needs to change?
The good news is that the Insolvency Service has recently made proposals to increase access to the DRO. The recognition that further changes are needed is encouraging to see, but we need to ensure the DRO provides a solution to problem debt for those it was created to help.
A higher debt limit
The debt limit of £20,000 is the most significant obstruction to accessing a DRO. More than a third (37%) of CAP’s bankruptcy clients only fail to qualify for a DRO because of the debt limit. The Insolvency Service suggests that an increase in the debt limit above £30,000 would only provide a marginal increase in the number of people eligible. However, CAP’s analysis shows that this is not the case.
Of the 37% of CAP clients who only fail to qualify for a DRO because of the debt limit, 40% have debts over £30,000.
While creditors may be concerned about the impact a higher debt limit would have on their balance sheets, those people who would gain access to a DRO can’t afford to repay their debts, nor do they have surplus income or assets that can be distributed to creditors in bankruptcy.
A higher vehicle value threshold
The new proposals will double the value of allowance assets to £2,000, but no change is proposed to the vehicle value threshold. This is at odds with the concerns of CAP Debt Advisors who encounter clients they feel should be able to benefit from a DRO but are excluded because they own a car of modest value that breaches the limit.
The average asking price of a used car according to the AutoTrader Retail Price Index is now 58% higher than five years ago when the £1,000 threshold was set.
To allow for a reliable car to be kept under a DRO limit and make sure disabled people are able to keep a suitable means of private transport, the vehicle value thresholds should also be raised to £2,000, and mobility scooters made exempt.
Discharge of all pre-existing debts
The ‘listed debt’ rule for DRO applications is out of line with the process for bankruptcy, in which all debts the person is liable for before the date the bankruptcy is granted are discharged. This can render the debt relief provided through a DRO ineffective.
It is incredibly difficult to establish a watertight list of debts owed. Not all lenders report to credit reference agencies, and credit reports only list lending and repayments in the past six years.
There is no reason why a pre-existing debt should not be discharged by a DRO application, if its inclusion would not have caused the debt limit to be breached. To allow for a debt to be retrospectively scheduled would make sure the debt relief provided through a DRO is effective, and significantly lighten the burden on the debt advice sector when supporting people with applications.
The DRO monetary eligibility thresholds are not updated in line with inflation each year, and aside from the one-time changes made in 2015, no other adjustments have been made since the DRO’s introduction in 2009. Over time, inflation has eroded the value of the limits, and advisors report that they are now seeing more people excluded from accessing a DRO who they feel should have been able to benefit.
The period between 2015 and 2021 demonstrates how rapidly the profile of people in financial difficulty can change.
Since 2015, low income households in particular have felt the burden of rising household bills, such as Council Tax, which has increased by 22% since 2009. Therefore, the current review of the monetary thresholds is welcome, but will not futureproof the solution. A regular schedule of reviews is needed, perhaps every three years to avoid such drastic changes in the future.
These changes would improve client outcomes across the sector. As well as being significantly more affordable than bankruptcy, CAP Debt Advisors also report that DROs provide a more timely, more certain and less stigmatised journey for clients.
More accessible DROs would also support the debt advice sector to help more people in the wake of the pandemic. Continued funding for debt advice and the provision of DROs is crucial too, of course. The recent recommendation of the Woolard Review to reconsider the fairness of the DRO fee is also extremely important. Scotland has already taken steps to reduce the fee for their DRO-equivalent Minimal Asset Process bankruptcy to £50, and waived it completely for people in receipt of certain benefits. Similar measures in England and Wales would make sure cost is never a barrier to accessing debt relief.
We urgently need to make the most of the changes that can be made in this Insolvency Service consultation, but a wider review of the DRO is then needed to address these wider points of failure in the near future.
Let’s simplify the solution to problem debt by allowing the DRO to be effective, accessible and affordable for the low income households it was designed to help. Read more in our new report, Simplify the solution.
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Photograph by Kathryn Anne Photography.