Keith Tully, of Real Business Rescue, explains the imminent changes that will make debt relief orders more accessible to those who need them.
New rules for debt relief orders (DROs) are introduced in October 2015, in the hopes that more people on low incomes and with minimal assets will be able to deal effectively with their debts.
The change to DRO rules opens up this low-cost option to a demographic struggling to escape debt. The previous debt limit of £15,000 had resulted in many people being stuck in a dire financial position, unable to afford the high fees of bankruptcy, but also powerless to repay the money they owed.
The cost of a DRO remains static at £90, which is minimal when compared with the £705 fee required to enter bankruptcy, and one of the reasons why a significant increase in the uptake of DROs is anticipated.
What changes are being introduced?
The new rules broaden the eligibility criteria for DROs:
- The maximum amount of debt will increase from £15,000 to £20,000.
- The maximum asset level has been raised to £1,000, not including a vehicle, which can be worth up to £1,000 in its own right.
The limit of £15,000 was originally set in 2009, when DROs were first introduced. Debt charity, Christians Against Poverty, has campaigned for the limit to be changed for some time, and would have preferred an even higher figure of £30,000.
CEO of the charity, Matt Barlow, says: “We had campaigned for the limit to rise to £30,000, which would have seen more than half of our clients able to afford this debt solution. However, the line had to be drawn somewhere, and £20,000 is a good start.”
Changes that do not penalise creditors
It is estimated that an additional 3,600 people will be eligible to use a DRO when these changes take effect in October. It is also worth noting that the £90 fee can be paid in instalments over 6 months, clearly a good option for those with limited incomes.
The Insolvency Service take pains to point out that these new rules will not adversely affect creditors. DROs remain available only to those with minimal assets, who have little likelihood of being able to meet their liabilities.
Bankruptcy criteria are also changing
The minimum debt level at which creditors can force someone into bankruptcy will also be increased from £750 to £5,000. This offers protection for those with low levels of debt, an issue referred to by the groups taking part in Insolvency Service research.
Debt charities and others in industry thought the existing limit of £750 was disproportionate, when considering the serious long-term repercussions of a debtor being forced to enter bankruptcy.
In the correct proportion
The changes taking place this year will make DROs more accessible to those who really need them.
Increasing the maximum debt limit should see many more people being able to access a debt solution intended specifically for their circumstances, with the changes to bankruptcy rules also offering protection against serious court action for those with smaller debt.
About the author
Keith Tully from Real Business Rescue, part of the Begbies Traynor Group, is a leading corporate insolvency specialist. He has over 25 years’ experience advising individuals and organisations facing financial uncertainty.