Fewer bankruptcies forecast after budget change – EXCLUSIVE
22 March 2024
Changes to debt relief orders made during the spring budget will reduce the number of bankruptcies in future, say insolvency professionals.
As part of chancellor Jeremy Hunt’s budget this month, the Government announced that it will abolish the £90 administrative fee for debt relief orders (DROs) effective from 6 April. Other changes taking effect from 18 June will raise the maximum debt threshold for the process from £30,000 to £50,000 and increase the maximum value of a motor vehicle that can be retained from £2000 to £4000.
Sarah May, insolvency and restructuring partner at Wedlake Bell said: “Although there is a small rise at the moment, bankruptcies have been declining year on year [in England and Wales] already. There will be more DROs and less bankruptcies in future, but bankruptcies tend to rise and decline at a slower rate because they have an increased lead time.”
But, May added “This is great news for those in desperate need. Those bankruptcies now eligible for a DRO are unlikely to be those that would see significant returns for creditors and are more likely to be debtor led. Fewer fees and fewer additional resources used by the Insolvency Service on bankruptcies mean that this is cost beneficial all around. However, it will be interesting to see how this might affect IVA providers, and whether there is an impact on credit lenders who may be less willing to lend or may up prices at the lower end of the market.”
The Insolvency Service currently receives £80 of the fee for administering the scheme while £10 is paid to the ‘competent authority’ as authorised by the government, which includes organisations such as The National Association of Citizens’ Advice Bureaux, the consumer credit counselling service, National Debtline, the Insolvency Practitioners Association and Shelter.
Kathryn Maclennon, partner in insolvency and restructuring at KBL solicitors said: “This change is positive, but it is a polarisation of debt solutions with bankruptcy and DROs moving further apart. We now have a system where there is a free debt solution for those with debts up to £51,000 – subject to other criteria – whilst a bankruptcy involves an immediate cost which is prohibitive for many. Moving the threshold from £31,000 to £51,000 does not address that.
“There is also the matter of who will pick up the bill. There were approximately 31,000 DROs in 2023, for which the £90 fee would bring in around £2.8 million in revenue. Bankruptcy cases do cost more to administer and the expectation may be that there will be fewer bankruptcies to handle as more people take advantage of the free DRO regime. Are we going to see a further rise in the bankruptcy fee? That will further polarise these two debt solutions."
"There will certainly be more DROs in future, but we will have to see how it will affect both bankruptcies and the IVA market.”
Julian Donnelly, managing director at personal insolvency-focused firm, James Rosa Associates, said: “This is a hugely positive move, which will likely help those whose creditors don’t want an IVA and who cannot afford a bankruptcy. And it comes at a time when thousands of families are using personal credit cards just to get by.
“While it seems unlikely that it will have an impact on the IVA and bankruptcy market, there is a question about whether the resources available will be able to cope with an influx of DROs and those seeking debt assistance. This could be a real wake-up call for personal insolvency after a significant period of inflation and rising interest rates, on top of those issues remaining after the 2008 financial crisis and the Covid pandemic. However, it could be setting up a massive issue in terms of numbers for organisations such as StepChange, which does tremendous work offering free debt management plans.”
Personal insolvencies in England and Wales spiked in February 2024 to reach 10,136, driven largely by a rise in DROs. There were 3007 DROs last month, up 44% from the same month in 2023. The quarterly statistics available for the rest of the UK show that personal insolvencies in Northern Ireland, which follows a similar system to England and Wales, fell by 28% in Q4 2023. Scotland saw only a 2% rise in personal insolvencies in Q4 2023 compared to the previous year.
Andrew Kelsall, partner at Larking Gowen, who wrote a historical look at personal insolvency in the Autumn 2023 edition of R3’s Recovery magazine, said: “The DRO was introduced in 2009 providing low-cost debt forgiveness for those with little to no assets. It was originally capped at a maximum threshold of £20,000, which was then raised to £30,000 and now £50,000. You would think that this is going to capture most debtors with minimal assets and help the Insolvency Service to make the most of its resources on higher-priority matters.
“This is good news for debtors and the Insolvency Service. It will be unlikely to have an impact on creditor petition bankruptcies, but could reduce the number of debtor petition bankruptcies, particularly where the debt is mostly consumer credit. However, it still does not deal with the issue of poverty and those that cannot meet their expenditure and bills on a monthly basis.”
The Insolvency Service said: “We are pleased to see the announcement in the budget that the £90 administration fee for Debt Relief Orders will be removed from April 6. This will make it easier for more people with problem debts to get a fresh start with their finances and access the support they need.”
Debt advice providers broadly welcomed the changes. Dame Clare Moriarty, chief executive of Citizens Advice, welcomed the chancellor’s action and said it will mean more people will find a way out of debt, but also warned that this year will be difficult, adding: “But we’re expecting this year to be just as tough, if not worse, than the last 18 months for many. Millions of households are living on empty and simply can’t afford to heat their homes or put food on the table.”
The Government announced its intention to further reform the personal insolvency framework in August of last year.
May said: "The Government's proposals for reform of the personal insolvency framework, following its consultation, are awaited with interest. The removal or reduction of the initial fees for bankruptcy is also under consideration as it can be a barrier to entry for those who cannot meet the criteria for a DRO, although perceived stigma remains another barrier. "
