DRO monetary eligibility consultation: Welcome proposals to help more individuals in debt
04 March 2021
While last year saw the biggest reforms to the UK’s corporate insolvency framework for almost twenty years, the beginning of this year has seen the Government explore making certain changes to the personal insolvency framework through a consultation on increasing the monetary eligibility thresholds for Debt Relief Orders (‘DROs’). Our full response to the consultation can be found here, while a summary of our feedback is included below.
The Government’s proposals
The consultation proposes to set new monetary limits on the criteria for obtaining a DRO in order to “give more people with low-levels of assets and low income who are in problem debt access to a suitable and proportionate option for debt relief,” by increasing:
- the total amount of debt allowable to £30,000 (from £20,000);
- the value of assets owned by the individual to £2,000 (from £1000); and
- the level of surplus income to £100 (from £50) per month.
According to Government estimates, these changes will allow 15,500 more people to eligible for a DRO – a “58% increase on the number of individuals who obtained one in 2019/20”.
We have welcomed the proposals, having called for the debt, income and asset thresholds for DROs to be raised for a number of years. DROs are a debt solution designed to help some of the most financially vulnerable individuals with low incomes, few assets and relatively low values of debt. As explained in R3’s Dealing with money worries guide, they are different to other personal insolvency procedures as no distributions are made to an individual's creditors and the individual in the DRO retains control over their assets. However, the current levels of debt, income and assets required to enter a DRO are too low, and prevent many financially vulnerable individuals from accessing the debt relief they need.
Since 2014, R3 has called for the debt limit to be increased to £30,000 and for the asset limit to be increased to £2,000. We are therefore pleased to see that the Government is proposing these precise amendments. We also support the Government’s plans to raise the surplus income level to £100 per month. These increases will help more indebted individuals access the most suitable debt solution for them – a need that is more urgent now given the impact the COVID-19 pandemic has had on many people’s personal finances.
Barriers to accessing DROs remain
That said, there are other thresholds, which are not being reviewed in this consultation, that also currently act as undue barriers in preventing financially vulnerable individuals from accessing a DRO. These include the £90 cost of entry and the £1000 limit on the value of a domestic motor vehicle.
We have previously recommended, and are again encouraging the Government to consider, raising the limit on the value of a vehicle to £3000, in line with the Minimal Asset Process (‘MAP’) used in Scotland. Vehicles worth less than £1,000 are likely to cost more to run than more expensive vehicles, and, as a result, will have a greater impact on an individual’s monthly surplus. The current threshold is also likely to restrict certain groups of individuals from accessing a DRO more than others, such as single parents, who might need a vehicle to take their children to school, and disabled people, whose needs mean that public transport is less likely to be a suitable option for them.
In our response we have also suggested that the Government considers reducing the £90 cost of entry for a DRO to £50, in line with the temporarily reduced entry fee to the MAP. However, we believe that this proposed change to the DRO fee should be permanent. While the £90 cost of entering a DRO is more accessible than that of bankruptcy, it is still a significant sum for indebted individuals with less than £100 of disposable monthly income. The current entry cost may push indebted individuals into opting for different debt solutions which are less suitable for their circumstances, or to delaying seeking the relief they need.
Further reform needed to the personal insolvency framework
Although the Government has taken significant steps to reform some elements within the personal insolvency framework in recent years, including the changes proposed in this consultation and the implementation of the new breathing space which will come into effect in May this year, there are pressing issues relating to other areas of the personal insolvency framework which are in need of reform. For example, many individuals with modest levels of debt and few assets who do not meet the criteria for a DRO are still prevented from accessing bankruptcy due to the £680 up-front fee. We have previously called for, and are continuing to recommend, that this fee is lowered to £200 in England and Wales, to bring it in line with the fee charged in Scotland.
As mentioned above, in the last few years the Government has consulted on a range of changes to the corporate insolvency framework, resulting, in part, in significant amendments to that framework through the Corporate Insolvency and Governance Act 2020. However, with the exception of the consultation on the breathing space and Statutory Debt Repayment Plan, it has been six years since changes were last made to existing parts of the personal insolvency framework.
In our response we have highlighted the importance of the Government undertaking a wider review of the personal insolvency framework as a whole, rather than assessing each debt solution separately. This would allow the Government to assess how well the various options currently align with each other within the framework, establish where changes are needed for each of the existing options and, ultimately, help more individuals out of debt by allowing them access to the most suitable solution for them. Such a review was necessary even without COVID-19, but the pandemic has hit the personal finances of hundreds of thousands of people across the UK – making the need for the personal insolvency framework to work effectively even more important.
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