Changes Announced to Debt Relief Orders (DROs)
The Insolvency Service has released an update following the consultation changes to Debt Relief Orders (DROs). The changes to DROs are now agreed, finalised, and will come into effect at the end of June 2021. Due to the changes, It is expected that over 13,000 more individuals may use DROs within the next 12 months and when compared to 2019 statistics. This represents a 50% increase.
The Insolvency Service sought to balance the need to provide debt relief to individuals whilst improving outcomes for creditors in the form of increased returns, additionally seeking to promote a ‘fresh start’ for many. This prompted the consultation for changes to DROs back in January 2021. Individuals with problem debts, limited assets and income would therefore benefit from DROs where they may not have qualified for the solution before.
The original consultation proposed the following changes:
- Increase the total amount of debt allowable to £30,000 (from £20,000);
- Increase the value of assets owned by the individual to £2,000 (from £1000). We are not proposing to change the items excluded from this calculation nor make any change to the £1,000 limit on the value of a domestic motor vehicle; and
- Increase the level of surplus income to £100 (from £50) per month.
Due to the proposed changes to DRO disposable income (DI) criteria (increase from £50 to £100), this would have inevitably impacted the DMP and IVA sectors where many individuals with problem debt have DIs of £100. The proposed DI has since been revised.
Following the consultation and industry responses, the agreed changes are as follows:
- Increase the threshold on the value of assets that a debtor can hold and be eligible to enter into a DRO from £1,000 to £2,000.
- Increase the value of a single motor vehicle that can be disregarded from the total value of assets from £1,000 to £2,000.
- Increase the level of surplus income received by the debtor before payments should be made to creditors from £50 to £75 per month.
- Increase the total debt allowable for a DRO from £20,000 to £30,000.
For those who are currently subject to an ongoing debt solution, as may be the case for solutions such as Debt Management Plans (DMPs) and Individual Voluntary Arrangements (IVAs), the changes to DROs may provide for a level of respite where individuals are no longer able to continue with a solution i.e., where there is a reduction in an individual’s disposable income. For Debt Management firms who must conduct annual reviews (or where otherwise required), DROs may be identified as a more suitable solution.
To ensure that firms are appropriately equipped ahead of the end of June 2021, changes to processes, scripts, advice (where applicable), content, and client-oriented communications should be updated to reflect the changes in DRO criteria. This applies to FCA regulated debt management firms, Insolvency Practitioners reliant on the IP Exemption, and non-advised lead generation firms.
What Are Debt Relief Orders?
Debt Relief Orders are legally binding solutions that enable individuals with problem debts, limited income, and assets, to repay creditors and have any remaining debts written off. The duration of a DRO typically lasts for 12 months and costs £90 to set up with an Official Receiver. Following this period, individuals are ‘discharged’ and no further payments to creditors are required.
Individuals who are suitable for DROs i.e., having been advised as to the suitability and satisfaction of DRO criteria, need to apply through an ‘approved intermediary’ (otherwise known as a ‘DRO Adviser’) who is specifically permitted to act in this capacity.