Money Advice Trust policy manager Meg van Rooyen blogs on our response to the Insolvency Service’s proposed changes to Debt Relief Orders
It has been a busy couple of weeks in the Money Advice Trust public affairs team – we’ve been briefing Peers on the Financial Services Bill as it passes through the House of Lords, responding to the FCA’s excellent final vulnerability guidance and getting ready for tomorrow’s all-important Budget.
And in and amongst all that activity, we’ve responded to a promising and timely consultation on some much-need changes to Debt Relief Orders (DRO) – an invaluable tool for helping people out of debt, and one that is about to become even more valuable in the wake of Covid-19.
It is these changes, and the wider conversation around debt options, that has been the focus of our work in the last few months following the publication of our Debt options in the new normal briefing back at the end of last year. We were pleased that the Insolvency Service has since issued their timely proposals to widen the cohort of people who will be eligible for a DRO in the future.
The DRO changes being proposed
Under the Insolvency Service’s proposed changes, people in financial difficulty will be able to qualify for a DRO if:
- Their debts are below £30,000 (previously £20,000);
- They have assets worth less than £2,000 (previously £1,000); and
- They have less than £100 surplus income after paying their essential bills each month (previously £50).
As you can see in our full consultation response submitted last week, we welcome these proposals – which will allow many more National Debtline and Business Debtline clients with few assets and low incomes to qualify for a DRO, and not have to go bankrupt or go into a low-value IVA instead.
The current debt limit of £20,000 is a barrier for many people who would benefit from a DRO – we welcome the proposed increase to £30,000 but think there is a case for an even higher limit, particularly given the higher levels of debt experienced by many self-employed people.
Similarly, the additional numbers of people who have fallen into debt unexpectedly as a result of Covid-19 mean that an increased asset limit is also needed – we have made the case for a limit of £3,000.
At the same time, the vehicle asset limit should be increased – also to £3,000, as is already the case in Minimal Assets Process bankruptcy in Scotland – as the current £1,000 limit is substantially lower than the average vehicle value for a typical National Debtline or Business Debtline client.
Crucially, all of these limits should not, in our view, be subject to periodic reviews after several years – or rather, in practice, whenever the debt advice sector and others are able to persuade the Insolvency Service they merit reconsideration. All eligibility limits should instead be index linked to inflation – that is, adjusted annually based on the Consumer Price Index – to prevent a repeat of recent years where the regulations have become wildly out of sync with the reality for people in debt. We really hope the Insolvency Service will take this on board.
Further reforms needed…
If you’ve read this far, you might have concluded these proposals are that rare thing – good news for people in debt – and they are.
As ever, however, there are further reforms that we have taken the opportunity to argue for in our consultation response, in the hope that the Insolvency Service look at the wider outstanding issues with DROs which remain unresolved by these proposals. We set out many of the options that should be considered in our recent Debt options in the new normal briefing.
- The £90 DRO fee could be waived for an extended temporary period of 12 months for all applicants – and for those on income-related benefits, this waiver could be put in place on a permanent basis.
- There could be a temporary suspension of rules preventing people from taking a DRO for a second time if they have entered a DRO in the last six years.
- The DRO regulations could be amended to allow applications to include missing or overlooked debts retrospectively.
- Given rising rent arrears due to Covid-19, the Insolvency Service could give greater flexibility and allow people to prioritise paying back their rent arrears within their DRO budget as an allowable expense.
…and a wider review of debt options
Whether or not the Insolvency Service take up any of these suggestions, it looks likely we will soon have a significantly improved version of Debt Relief Orders to help people in debt in the wake of Covid-19. This comes after some temporary improvements to the IVA Protocol last year to reflect the impact of the pandemic.
Beyond these welcome changes to individual insolvency options, we think it’s important that the Government should commission a full review of the debt options available to people in financial difficulty – to ensure that no one is allowed to fall through the cracks in a framework that has evolved in a piecemeal fashion over several decades. A wider review is already under way in Scotland – and it is a call echoed in the Woolard review recommendations, which we hope will be taken forward by the FCA. A review should also consider the damaging practices of the lead generation industry, which must be urgently addressed, too.
And to end this blog where we started it – with the Financial Services Bill – it is equally important that the government brings forward its planned new debt solution, the Statutory Debt Repayment Plan (SDRP), as quickly as possible. SDRPs will play an important role in helping households to recover from the long tail of the impact of Covid-19 – and we hope that the government will take the opportunity of the Financial Services Bill to set a clear timetable for their introduction.
If you put all of these proposals together – and if you look very hard – you can begin to see the makings of a debt options landscape that makes sense.