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Welcome News on Debt Relief Orders – but room for improvement

Posted: 27th Oct 2015

By Rory McGimpsey with guest blogger Mike Thomas of Debtwizard

The changes in the insolvency world that came into force on 1 October 2015 have been well publicised, but how will they affect debtors and their families? Although the Insolvency Service has increased the debt threshold for bankruptcy petitions, it’s the changes to Debt Relief Orders that are particularly eye catching. For those who missed it, the creditor threshold for petitioning someone for bankruptcy increased from £750 to £5,000 (this was last revised in 1986), while the maximum level of unsecured debt covered by a DRO has increased from £15,000 to £20,000. In addition, DRO asset limits were increased to £1,000 (plus a vehicle of no more than £1,000 in value), while the maximum surplus income to qualify remains a modest £50 per month. These changes are applicable to all DROs UK wide, but have not yet been implemented in Northern Ireland. The changes will be expected to come into force in early 2016.

While the changes were warmly welcomed by money advisors and debt charities alike, it is reasonable to ask: do they go far enough? When DROs were introduced by the government in 2009, they were intended to fill a void in the debt solutions available. In fact, DROs were introduced as a mechanism for helping debtors with no real assets and minimal disposable income for whom an IVA wasn’t suitable, but couldn’t afford to meet the costs of a bankruptcy petition. Despite this, the restrictive eligibility criteria for a DRO meant that many individuals and families were left outside the net, with assets or debt too high to meet the requirements of a DRO, but still unable to meet the prohibitive costs of bankruptcy. While the new changes will open up DROs to many more people (the Insolvency Service estimates that up to 3,600 more a year may benefit), the argument can be made that they’re still overly restrictive.

Being a homeowner, even if in negative equity, automatically rules out applying for a DRO, but even those who do not own their own property may still fall foul of the qualifying criteria. For example, while many household items are exempt from inclusion in the DRO, others can be included if a more cost effective alternative can meet the individual’s basic domestic need. And despite the fact that the debt threshold has been increased to a more realistic £20,000, there will still be many individuals who have minimal assets, but whose debts exceed that level. Consider the amount of young people with credit card and payday loan debts, and you can see how the eligibility criteria remain pretty restrictive. There are arguably other structural flaws in DROs. As Debtwizard explains:

“What has not been addressed is the natural disincentive for an individual on a DRO to find employment or improve their circumstances. Under the eligibility rules for DROs, the person must disclose if their circumstances and or income change over the 12 month period the order is in force. If for example the individual were to find employment or receive a rise in their income at any time during the 12 month period of the DRO, then this extra income may well mean they are no longer eligible and their DRO may be revoked. So why bother to improve your situation?”

The changes are not set in stone, however, and many debt charities plan to lobby for further change. For example, Christians Against Poverty believe that the debt limit for DROs should be increased to £30,000, thereby capturing more individuals who have accrued high unsecured debt but have negligible assets. The Insolvency Service has pledged to review the criteria again in 2017, and therefore there will be time for interested parties to make submissions. There is hope that further change can be affected. The fact that these changes have been implemented at all is proof of the power of effective and persistent lobbying. There remains a compelling case for the government to go even further. Since their advent in 2009, DROs have emerged as an effective, useful debt solution. The recent changes are another step in the right direction. While applauding their introduction, it’s not unreasonable to ask how much more effective DROs could become if the eligibility criteria were expanded further.

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