A fresh start — welcome changes to DRO eligibility criteria must lead to a wider review of insolvency solutions
For those with low incomes and no assets being in debt can feel like being trapped, with the demands of creditors compounding a sense of hopelessness.
DROs were created in the wake of the financial crash to give people an alternative to expensive bankruptcy proceedings, giving those with little means to repay debts a fresh start after a year of sticking to a limited debt payment plan.
However, over time the eligibility criteria for these debt solutions have become increasingly exclusionary.
Without any changes since 2015, the monthly budget surplus limit of £50 and overall debt limit of £20,000 have meant that many whom the solution was originally intended to help have been locked out, with limited options to resolve their debt problems.
The proposals would see the budget surplus limit increased to £100. We think that this is a positive change that will give an option to those who still struggle to afford bankruptcy.
At £680 it would currently take over a year for an individual with a £51 surplus to access this solution if they saved every penny of their disposable income after covering essentials.
Even with a £101 surplus it will take someone over six months to raise the fee for bankruptcy. The change improves the options of those on low incomes without compromising the original policy intention of DROs.
The Insolvency Service have also proposed increasing the debt limit to £30,000. This is another positive step which will greatly improve the options for those on low incomes.
For those with large debts who can’t afford bankruptcy, repayment options can mean decades of repayment during which time any negative change of circumstances can have grave consequences.
Finally, the Insolvency Service has proposed increasing the asset limit to £2,000. This is another welcome proposal. Most people we recommend for DROs do not have assets.
Less than 1% of our clients currently miss out on a DRO because of the asset limit alone. The costs of realising the value of assets means that even at £2,000 the amount returned to creditors will be minimal.
We recommend that the Insolvency Service also increase the vehicle limit to £2,000. The current limit of £1,000 is low, with clients hesitant about trading in vehicles for something worth less than this for fear of high maintenance costs or an unreliable car which they often require for work.
With the worst financial impacts of the pandemic concentrated on those with low incomes, it’s essential that the debt solution landscape is designed to offer a suitable route out of debt for all those who fall into difficulty.
These changes to DRO eligibility are a valuable first step in responding to the crisis.
We would, however, like to see some flexibility around the £90 fee. We regularly complete applications for clients who then take 4–5 months to raise this amount.
In the recent Woolard Review the FCA recommended the creation of an emergency fund to help those without the means to pay. We would also like to see a change to the approach to debts missed off an application.
At present, debts discovered after the application are not included in a DRO, which is at odds with the approach taken to debts missed in bankruptcy and Breathing Space which are subject to protections even if they are added after the initial application.
Increased discretion in cases where missed debts push an individual over the debt limit should also be considered. Revoking a DRO at this stage is costly for all involved, and can leave someone back at square one with no option for resolving their debt problems.
It’s not just DROs that need reform. We would welcome a wide-ranging review of insolvency solutions to address gaps in access and tackle problems.
The bankruptcy fee is too high while there are structural problems in the IVA market where incentives for lead generators resulting in many being recommended this solution inappropriately.
We look forward to the Insolvency Service’s consultation into the regulatory structure around IVAs as change is urgently needed. In future, Statutory Debt Repayment Plans will add another option for people in debt but there is still no clear timetable for when these will be implemented.
Across the board — and particularly in the case of DROs — consideration needs to be given to the funding of debt advice.
Only around two thirds of the delivery costs for DROs are covered, which means that organisations like us must cross-subsidise the costs of making sure that they are available to those clients for whom they are the right solution.
With the impacts of the pandemic only beginning to crystallise, it’s vital that both free advice and viable routes out of debt that are the best fit for the individual client are available to all those who fall into difficulty.
You can read our full response to the Insolvency Service consultation here.