New DRO Criteria: Do they offer a simplified solution to debt?
I don’t imagine any of us has ever been stuck in quicksand in real life. We’ve seen it in TV shows or films; the brave hero or heroine struggling to escape as they’re slowly dragged down to their doom, desperately reaching for a branch or vine to pull themselves free. The image I conjure is what I imagine being in problem debt is like; feeling helpless as your struggle to escape only seems to make things worse. Your fingers stretching for that dangling rope just inches from your grasp.
As debt solutions go, a debt relief order (DRO) is a pretty sturdy-looking rope. Designed originally for those with low income and minimal assets, it’s a form of insolvency that’s different from bankruptcy, while still offering complete relief from debt. It’s simple, effective, and easy to use. Yet for many, it is a rope that is out of their reach, perhaps because they have too much debt, or they have a car that’s worth ‘too much’. In our quicksand scenario, these are people who have sunk up to their armpits, rather than their waist. It seems unthinkable that you would choose not to throw someone the rope just because of how deep they were stuck in the sand.
CAP’s recent campaign, Simplify the Solution, draws attention to these people.
Prior to the recent changes, the income and assets eligibility criteria for a DRO have not changed since it first came into being eleven years ago. It has become clear to us that too many families are missing out on a life-changing chance at debt relief, or are being forced to pay hundreds of pounds more to go through bankruptcy. Surely you shouldn’t need to pay for a crane to pull you out of quicksand when a rope would do just as good a job.
It’s pleasing to see that the Insolvency Service has listened to our campaign, as well as the evidence of many others, and revised the DRO entry criteria. They have agreed to lift the upper debt threshold of £20,000 to £30,000, doubled the asset limit, increased the surplus income threshold by 50%, and provided guidance that protects mobility scooters as an essential vehicle. As a result of these changes, the Insolvency Service predicts an additional 13,200 people will be able to access a DRO each year. From CAP’s perspective, we estimate that a further 8% of the people helped through our debt service will be saved from having to pay £680 in fees to go bankrupt.
Three in five of those identified in our campaign will no longer be excluded from a DRO.
This is a huge step in the right direction for thousands of households, and we both celebrate and applaud the action being taken to protect those in such urgent need of help.
We celebrate the announced intention to issue a call for evidence regarding the personal insolvency landscape. This gives a route to address the wider concerns raised, but not covered, in this consultation. CAP’s recently launched Client Report ‘Our story’ showed that, over the last five years, progressively more CAP clients have needed to seek insolvency as their route out of debt, yet the number eligible for a DRO has fallen. The recent changes will make a difference to that trend, but that same report shows that debt levels are still on the rise while income levels are not growing at even close to the same rate. Excitingly, the government has committed to exploring this area further as part of its wider review of the personal insolvency landscape.
There will, however, come a point where these newly revised eligibility criteria will need to be reviewed even further, giving particular attention to those the DRO was designed to help. After all, this is the most significant review in eleven years. We would like to see that wait for a review reduced so that as policy and society changes, so do the methods that exist to protect them. In our consultation response we suggested a review every three years would ensure the eligibility criteria more closely tracked the economic and financial context the solution operates in.
Following the Insolvency Service’s changes, the most significant remaining barrier to many people accessing a DRO is financial. Anyone seeking relief from their problem debt through this solution must pay a £90 fee. Let’s put this in context of the people CAP help, where 37% are sacrificing meals, 31% can’t afford basic toiletries, and 44% are unable to afford adequate clothing for themselves or their families. For this group of people, £90 is a week’s worth of food for their children or petrol in their car to get them to work. It’s money they cannot afford to put into their insolvency fee. That leaves them trapped in a situation where they are unable to afford any debt relief. In other words, you need to pay the person to throw you that rope before they’ll pull you out of the quicksand, but you’ve got no money in your pocket.
What next?
The next stage in helping those people who desperately need the relief of a DRO must come in the form of a review of these up-front fees. Support for these fees is minimal and often the burden is put onto these households in low income situations or on the generosity of charitable organisations to enable them to access it. As demand is only going to rise, the various sources of additional funds to assist destitute families with fees will be stretched even further, meaning even those made newly eligible for a DRO following these changes will struggle to access one.
The issue of non-listed debts is the other area still needing some consideration from the Insolvency Service. If a person goes through a DRO, they have to list all of their debts and balances. This isn’t always as simple as it seems, and missed debts or underestimated balances can cause huge problems further down the line. We would like the Insolvency Service to understand just how difficult it can be for those in particularly vulnerable situations to have clarity on everything they owe; indeed, those who are most indebted can often struggle to keep track of it all. We would be in favour of a review of this policy so that qualifying debts can be added after the DRO has been granted (though before the moratorium ends) so that the DRO can continue to be the clean slate it is meant to be.
Given the Insolvency Service’s response to our campaign asks, we are pleased they are willing and able both to listen and to implement the adjustments they have made. This conversation should not end here, however. CAP will continue to call on the Insolvency Service and the government to keep reviewing DROs as a debt solution that should be accessible to all, regardless of their ability to pay. We also look forward to seeing the promised call for evidence issued as soon as possible.
You can read more about our Simplify the Solution campaign here.
