About 13,000 additional people could benefit from a solution designed to help them solve their debt problem from next month, under proposals published by the government today.
The Insolvency Service has announced a range of changes to debt relief orders, which have been described as “bankruptcy-light” and aimed at those with little money to pay off 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 app comes with a £90 fee that will remain unchanged, despite a review by regulators in February calling it a “significant barrier to uptake”.
Debt forgiveness orders target those who have little money to pay mounting debts
But other changes have been made to DROs to make them easier to access. Previously only open to those with a disposable income of less than £50 per month, this will be increased to £75.
Meanwhile, the value of the cars and the sum of other assets that can be exempt from the DRO has doubled to £2,000.
DROs are for those with mounting debts that they can’t pay even if interest is frozen, and they last for a year.
During this period, all debts are frozen and creditors cannot take action against the user if they do not make any payments.
They cover council tax and utility debts as well as personal debts such as credit cards, and must be established by a registered ‘competent authority’.
The insolvency department declaration is the latest intervention by the government to try to help people deal with their debt problem.
Last Tuesday, a so-called “breathing space” scheme was opened up for debtors, allowing up to 700,000 people to stop the clock on certain debts for 60 days.
Meanwhile, in the March 3 budget, the government said it would set aside £3.8m for trial zero-interest loans, aimed at helping those with large interest-bearing debts they cannot afford.
What debt solutions are there?
Here are some terms readers should know in order to dominate the conversation about debt:
Debt management plan: An informal agreement to pay off non-priority debts (which means excluding things like council tax and mortgage bills) in one monthly payment, for those who aren’t struggling so much that debts have to be written off. Interest and fees on debt are often frozen during these. It can be free or for a fee
bankruptcy To those who owe at least £5,000 and have no means of paying it back. It costs £680 and is an admission of someone’s inability to pay their priority and non-priority debts.
Debt forgiveness order: Those who owe less than £20,000 and have a disposable income of less than £50 per month, which would make them unable to pay their debts, can apply for one of these debts. These figures could be changed to £30,000 and £75, under proposals from the Insolvency Service.
It comes with an upfront fee of £90, which regulators warn has proven to be a ‘major handicap’ for some, and usually lasts a year and the debts included in it can be written off after that.
– Individual Voluntary Arrangement: Their popularity has boomed in recent years amid concerns that they are being missold as “life hacks”. These charge upfront fees of around £5,000 on average and find borrowers signed up for formal and legally binding debt repayment schemes which can run 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 have been largely welcomed by charities and debt counsellors, who said the changes were “timely” due to the drop in some people’s incomes during the pandemic.
Sarah Williams, a debt counselor who writes the Debt Camel blog, said: “The changes are good news — these limits haven’t changed for years, so DROs are becoming less useful.
“More people may need DROs if the pandemic reduces their income, so the changes are timely.”
However, she noted that the £90 fee could be problematic for those with significant debt with little spare money.
Peter Totton, head of policy at debt charity StepChange, added: ‘We are delighted to see the Bankruptcy Service confirm increases to asset limits which will enable more people to access debt relief orders.
DROs can act as a valuable form of debt “reset” for some people, and are likely to be especially useful in the aftermath of a debt pandemic.
There were 2.4 million British adults in problem debt at the start of this year, according to StepChange figures, with up to 11.3 million still struggling with the impact of the coronavirus pandemic on their income.
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