Thousands of hard-up Britons could benefit from biggest changes to Debt Relief Orders in years… but they still face a £90 upfront fee
- DROs are aimed at those who struggle to pay any interest-bearing debts
- They last for a year and protect borrowers from any enforcement action
- However, the eligibility requirements have not been changed for years
- New rules will expand the number of people who can apply for one
Some 13,000 more people could benefit from a solution designed to help them with problem debt from next month, under proposals published by the Government today.
The Insolvency Service announced a raft of changes to Debt Relief Orders, which have been described as ‘bankruptcy-lite’ and are aimed at those who have little money to pay their debts.
From 29 June those who owe less than £30,000 will be able to apply for a DRO, up from £20,000 currently.
The application comes with a £90 fee which will remain unchanged, despite a review by regulators in February calling it ‘a significant barrier to uptake’.
Debt Relief Orders are aimed at those who have little money to pay mounting debts
But other changes have also been made to DROs to make them more accessible. They were previously only open to those with a disposable income of less than £50 each month, but this will be increased to £75.
Meanwhile, the value of cars and the total other assets which can be exempted from a DRO are both being doubled to £2,000.
DROs are intended for those with mounting debts which they cannot repay even if interest is frozen, and they last for a year.
During this period, all debts are frozen and creditors cannot take action against a user if they don’t make any payments.
They cover council tax and utility debts as well as personal debt such as credit cards, and must be set up by a registered ‘competent authority’.
The announcement from the Insolvency Service is the latest intervention by the Government to try and help people deal with problem debt.
Last Tuesday the so-called ‘Breathing Space’ scheme was opened up to those in debt, allowing as many as 700,000 people to stop the clock on certain debts for 60 days.
Meanwhile in the 3 March Budget the Government said it would allocate £3.8million for a pilot of no-interest loans, aimed at helping those with large interest-bearing debts they could not afford to service.
What debt solutions are available?
Here are some of the terms readers should know in order to get to grips with the conversation around debt:
– Debt Management Plan: an informal agreement for paying back non-priority debts (meaning things like council tax and mortgage bills are excluded) in one monthly payment, for those not struggling quite so much that debts need to be written off. Interest and charges on debts are often frozen during these. They can be free or fee-charging
– Bankruptcy: For those who owe at least £5,000 and have no means of paying it back. Costing £680, it amounts to a declaration that someone can’t pay back their priority and non-priority debts.
– Debt Relief Order: Those who owe less than £20,000 and have a disposable income of less than £50 each month leaving them unable to pay their debts can apply for one of these. These figures could be changed to £30,000 and £75, under proposals from the Insolvency Service.
It comes with a £90 upfront fee, which regulators warned proved a ‘significant barrier’ to some, usually lasts for a year and can see debts included in it written off afterwards.
– Individual Voluntary Arrangement: These have boomed in popularity in recent years amid fears they are being mis-sold as ‘life hacks’. These charge upfront fees of around £5,000 on average and see borrowers signed up to formal and legally binding debt repayment plans which can last for five to six years.
They are usually only recommended for those with more than £10,000 in debt.
Source: Citizens Advice
The changes to DROs were largely welcomed by charities and debt advisers, who said the changes were ‘timely’ due to reductions in some peoples’ incomes during the pandemic.
Sara Williams, a debt adviser who writes the blog Debt Camel, said: ‘The changes are good news – these limits had been left unchanged for years so DROs were becoming less useful.
‘A lot more people may need DROs if the pandemic has decreased their income, so the changes are timely.’
However, she noted the £90 fee could be problematic for those with large debts with little spare money.
Peter Tutton, head of policy at the debt charity StepChange, added: ‘We are pleased to see the Insolvency Service confirmation of increases to the asset limits that will enable more people to access Debt Relief Orders.
‘DROs can act as a valuable form of “reset” from debt for some people, and are likely to be particularly useful in the wake of pandemic debt.’
There were 2.4million British adults in problem debt at the start of this year, according to StepChange figures, with as many as 11.3million still suffering from the impact of the coronavirus pandemic on their incomes.