By Lorraine Conway
27 August 2021 Debt Relief Orders
Summary 1 Background: why were DROs introduced? 2 How to obtain a DRO 3 Pros and cons of a DRO 4 Reviews of DRO eligibility criteria
commonslibrary.parliament.uk Number 4982 Debt Relief Orders
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Contents
1 Background: why were DROs introduced? 5
1.1 Consultation 2004 5
1.2 Legislation: introduction of DROs in 2009 6
2 How to obtain a DRO 7
2.1 Who can apply? 7
2.2 How do I apply for a DRO? 8
2.3 What are the immediate effects of a DRO? 9
2.4 Restrictions imposed by a DRO 10
2.5 Changes in the debtor’s circumstances 10
2.6 What happens when the DRO ends? 11
3 Pros and cons of a DRO 12
3.1 Advantages of a DRO 12
3.2 Disadvantages of a DRO 12
4 Reviews of DRO eligibility criteria 14
4.1 Treatment of pensions - 2011 14
4.2 Increase in debt relief eligibility criteria - 2014 14
4.3 Increase in debt relief eligibility criteria – 2021 15
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Summary
Debt Relief Orders (DROs) came into force on 6 April 2009, introduced under the Tribunals, Courts and Enforcement Act 2007 (TCEA 2007). To apply for a DRO, the applicant must satisfy strict eligibility criteria. DROs are administrative rather than court-based; they are made by Official Receivers working in partnership with the professional debt advice sector.
The aim of a DRO is to provide a low-cost debt remedy aimed at the financially excluded who have relatively levels of debt, little surplus income and few assets. DROs offer a workable debt relief remedy for those who cannot take advantage of other debt remedies, such as Individual Voluntary Arrangements (IVAs), and where bankruptcy would be disproportionate. DROs provide a fresh start for vulnerable people trapped in debt.
Assuming a debtor qualifies for a DRO, the order will freeze their debt repayments and interest for 12 months. During this time creditors cannot take debt recovery action without the court’s permission (there is a strict moratorium). At the end of the year, the debtor will be free of all the debts listed in the order provided their circumstances have not changed. In effect, debts are written-off - the debtor won’t have to pay them.
A DRO is available in England and Wales, and Northern Ireland. Individual insolvency in Northern Ireland is governed by separate, but broadly similar, legislation to England and Wales. Legislation relating to individual insolvency in Scotland is devolved, and Scotland has its own sequestration regime. In Scotland, a Minimal Assets Process (MAP) bankruptcy offers debtors a similar solution to a DRO, but has different benefits, risks and fees associated with it.
This briefing paper summarises the main features of DROs in England and Wales, with emphasis on the eligibility criteria.
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1 Background: why were DROs introduced?
1.1 Consultation 2004
In 2004, the Department for Constitutional Affairs (DCA) published a consultation paper, “A choice of paths: better options to manage over- indebtedness and multiple debt”. In this paper the DCA suggested that there was a group of vulnerable people who were financially excluded from any debt relief remedy. This group had relatively low levels of liabilities, no assets over and above a nominal amount and no surplus income with which to come to an arrangement with their creditors (see Box 1 below). The DCA sought views on possible options to help people deal with over-indebtedness, particularly multiple debt.1
Box 1: Exclusion from debt relief remedies
Prior to the introduction of DROs, the main debt relief remedies were: 1. individual voluntary arrangement (IVA) 2. county court administration order 3. a non-statutory debt management plan (DMP) 4. bankruptcy For debtors with few assets and no surplus income these debt remedies were not an option. For example, an IVA or DMP is only a workable option if the debtor has funds available (or assets to sell) to make regular payments to creditors. Bankruptcy is a disproportionate response for a debtor with no real assets.
On 31 March 2005, the Insolvency Service published a consultation paper, “Relief for the Indebted – An Alternative to Bankruptcy”, in which it sought
1 Department for Constitutional Affairs consultation paper, “A choice of paths: better options to manage over-indebtedness and multiple debt”, July 2004, Paper No. CP23/04
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views on a proposed new debt relief order procedure.2 It proposed a new non-court-based scheme of debt relief; a scheme that would be simple and relatively cheap to administer. This consultation ended on 30 June 2005.
In December 2005, the ‘Debt Relief Order Intermediary Working Group’ Intermediary contributed to the further development of a new DRO scheme. This group was Working Group made up of representatives from the debt advice sector and the Insolvency Service who met to discuss how the DRO scheme might work.
1.2 Legislation: introduction of DROs in 2009
DROs came into force on 6 April 2009, created by section 108 of the Tribunals, Courts and Enforcement Act 2007.3 The actual detail of the DRO scheme is contained in secondary legislation, namely, the Debt Relief Orders (Designation of Competent Authorities) Regulations 2009 (the Regulations) and the Insolvency (Amendment) Rules 2009 (the Rules).
2 Insolvency Service. “Relief for the Indebted – An Alternative to Bankruptcy’, March 2005”, [not online] 3 Specifically, Schedules 17 to 20 of the Tribunals, Courts and Enforcement Act 2007 now inserted into the Insolvency Act 1986
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2 How to obtain a DRO
2.1 Who can apply?
DROs are only intended to be used by those people with relatively low liabilities, little surplus income and few assets who are unable to pay off their debts in a reasonable time. The debtor must meet certain criteria to qualify (see Box 2 below).
Box 2: Eligibility criteria:
To be eligible for a DRO, the applicant must meet the following strict criteria:
• be unable to pay their debts • owe in total £30,000 or less • the value of their total assets must not exceed £2,000 (if the value of a single motor vehicle is £2,000 or less it can be disregarded from the total value of assets) • their disposable income, after paying tax, national insurance, and normal household expenses, must not exceed £75 per month • they must have lived or worked in England or Wales in the last 3 years • and they must not have had a DRO in the last 6 years.
An applicant will not be eligible for a DRO if they are involved in any other formal insolvency procedure. For example:
• an undischarged bankruptcy • a current Individual Voluntary Arrangement (IVA) • a current Bankruptcy Restrictions Order or Undertaking • a current Debt Relief Restrictions Order or Undertaking • a pending debtor’s bankruptcy petition in relation to the debtor (and the debtor has not been referred to the DRO procedure by the court as a more suitable method of debt relief)
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• or a pending creditor’s bankruptcy petition against the debtor (and the debtor has not obtained the creditor’s permission to apply for a DRO instead).
Most debts (“known as “qualifying debts”) are included in a DRO. This includes household utility bills, council tax and consumer debt (like credit and store cards). However, certain types of debt cannot be included in a DRO, these “exclude debts” include:
• court fines and confiscation orders (i.e., fines relating to criminal activity) • child support and maintenance • student loans • television licence arrears • loans from the DWP Social Fund (such as budgeting loans) • and debts that have been taken out fraudulently (including benefit overpayments that have occurred as a result of fraud).
The debtor must pay these debts separately. Creditors of these debts can still act against the debtor even though the debtor has a DRO in place.
It should be noted that during the life of the DRO, the debtor cannot add new debts to the DRO or debts that he/she forgot about.
2.2 How do I apply for a DRO?
A debtor is only able to apply for a DRO once every 6 years. DROs are an administrative, An application for a DRO can only be made with the assistance of an rather than court “approved intermediary” (e.g. an adviser from Citizens Advice or 4 based, procedure StepChange). An approved intermediary means a trained debt advisor who has been approved to act as an intermediary by a “competent authority”.5 In practice, debtors usually apply for a DRO online with an approved intermediary helping them to complete the application form.
Upon receipt of an application and payment of a fee, an Official Receiver can make a DRO administratively without the involvement of the court. However, the Official Receiver can also refuse an application or choose to delay a decision pending a request for further information.
When applying for a DRO, the debtor must not:
4 For a list of approved intermediaries see, Insolvency Service, “Guidance – Getting a Debt Relief Order”, 29 June 2021 5 A list of approved intermediaries should be available at Citizens Advice offices
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• give away anything of value or sell anything for less than their true worth, • destroy or fake any books or documents, • conceal from the Official Receiver any change in their circumstances that would affect their application.
It is an offence to commit any of these actions. Whilst the Official Receiver will not automatically investigate cases, he is able to do so either on his own account or as the result of an objection from creditors. Following an investigation, the Official Receiver may revoke a DRO if the debtor is found to have failed to provide a full and accurate account of their financial affairs (for instance, if they deliberately under-valued their assets or income).
Alternatively, the Official Receiver may make an application to the court for a Debt Relief Restrictions Order, which will extend the restrictions placed upon a person under a DRO for a period up to 15 years. In serious cases, the debtor could be prosecuted and fined, sent to prison or both. However, the debtor will not be found guilty of an offence if he/she can show that they did not intend to defraud anyone or hide information.
2.3 What are the immediate effects of a DRO?
On the making of a DRO, the debtor is discharged from all debts included in the order after one year (time runs from the date of the order) provided his circumstances haven’t changed.
During the one-year period that a DRO is in force, the debtor is protected from all creditor action (there is a moratorium), except for:
• certain creditors whose debts cannot be scheduled in the DRO (i.e., “excluded debts”) • and those creditors whose debts are included in the DRO but who have successfully obtained the court’s permission to pursue their debts.
For the duration of a DRO, the debtor is obliged to provide information to, and co-operate with, the Official Receiver. The debtor is expected to make arrangements to repay their creditors should their financial circumstances improve.
Importantly, as with other forms of personal insolvency, a person’s credit rating will be affected by the making of a DRO. There are civil and criminal penalties for those who abuse the system.
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2.4 Restrictions imposed by a DRO
For the duration of the DRO (usually 12 months), the debtor will be subject to similar restrictions as a bankrupt (see Box 3).
In some circumstances, the Official Receiver may apply to the court for a “Debt Relief Restrictions Order”, which extends the period of the restrictions for between 2 and 15 years. This step is usually taken if the debtor has been dishonest about something relating to their DRO. Alternatively, the debtor might accept a Debt Relief Restrictions Undertaking, effectively agreeing to continue with restrictions without going to court.
Box 3: Restrictions on a debtor subject to a DRO
Restrictions include:
• The debtor must not obtain credit of £500 or more, either alone or jointly with another person, without disclosing to the lender that they are subject to a DRO. • The debtor may not carry on a business in a name that is different from the name under which they were granted a DRO, without telling all those with whom they do business about their DRO. • The debtor may not be involved (directly or indirectly) with the promotion, management, or formation of a limited company, and may not act as a company director, without the court’s permission. • The debtor cannot apply for an overdraft without telling their bank or building society about their DRO. The debtor cannot write cheques that are likely to bounce.
It is a criminal offence to break the restrictions – the debtor may be prosecuted if they do. In addition, the debtor may not apply for another DRO for 6 years from the date their DRO was approved.
2.5 Changes in the debtor’s circumstances
A debtor that has been granted a DRO must tell the Official Receiver if there are any changes in their circumstances during the period of the DRO. By way of example, these changes might include:
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• Errors or omissions – i.e., any information which the debtor realises is wrong or has been missed out from the information he/she has given when applying for a DRO. • An increase in the debtor’s income. • Additional money or valuables that the debtor has acquired (e.g., money or property inherited by the debtor)
The debtor may be committing an offence if he/she fails to tell the Official Receiver of any positive change in their circumstances. This could lead to the DRO being revoked (leaving the debtor exposed to the immediate demands of his/her creditors).
2.6 What happens when the DRO ends?
A DRO will usually end after 12 months (with time running from the date of the order). Assuming the debtor’s circumstances have not changed, all debts listed in the DRO will then be written off - the debtor will not have to pay them. However, the debtor will still have to pay any outstanding debts not included in the DRO.
A DRO is added to the Individual Insolvency Register. This is removed 3 months after the DRO ends.
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3 Pros and cons of a DRO
There are advantages and disadvantages with DROs. As with any debt solution, it is important for the debtor to seek proper advice based on a full appraisal of their financial circumstances to make sure a DRO is suitable for them.
3.1 Advantages of a DRO
A DRO is a way to have debts written-off if the debtor has a relatively low level of debt and few assets. In particular, a DRO can provide a fresh start for a vulnerable person trapped in debt. Some of the advantages of a DRO are as follows:
• A DRO can be a low-cost alternative to bankruptcy. Although a DRO is a formal debt solution, the debtor doesn’t need to appear in court.
• DROs are administrative rather than court-based; if the debtor qualifies for a DRO, an approved intermediary can apply to the Insolvency Service on the debtor’s behalf.
• As soon as the DRO is approved, creditors included in the order cannot take any action to collect their debt. In effect, the DRO freezes the debtor’s debt repayments for 12 months (i.e., the moratorium period).
• If the debtor’s financial situation hasn’t changed by the end of this 12- month period, then all debts included in the DRO will be discharged (i.e., written-off).
3.2 Disadvantages of a DRO
As with any debt solution there are some disadvantages associated with DROs, they include the following:
• A DRO is only available if the debtor owes £30,000 or less and lives in England or Wales.
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• For most people owning a home will exclude them from a DRO, they would have to think about a different debt solution.
• The debtor will usually need to pay the Insolvency Service a one-off set- up fee (currently £90).
• Some debts cannot be included in a DRO (these include court fines, student loans, and child maintenance payments).
• Should the debtor’s circumstances change during the 12-month moratorium period, the DRO may be cancelled, but this would only happen if the debtor no longer met the strict criteria for a DRO (e.g., they have received a significant pay rise or an inheritance).
• A DRO will affect the debtor’s credit rating for 6 years from the date it is approved. However, this is also true of a bankruptcy order.
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4 Reviews of DRO eligibility criteria
4.1 Treatment of pensions - 2011
When first introduced in April 2009, DROs were criticised for treating pensions worth over £300 as an asset even if the pension was of low value and not receivable for many years. Consequently, some people who would otherwise have qualified found themselves unable to apply for a DRO because they had pension rights.
On 23 March 2010, the Insolvency Service published a consultation document asking whether changes should be made to make the DRO scheme fairer.6 In a written Ministerial Statement on 9 November 2010, Edward Davey, then Parliamentary Under-Secretary for the Department of Business Innovation and Skills (now BEIS), announced plans to amend the eligibility criteria.7 On 6 April 2011, changes were made to allow those with HMRC-approved pension schemes to have access to a DRO.
In practice, this means:
• If the applicant has not retired, but has a private or occupational pension fund, in most cases the value of the pension fund will not count towards the £2,000 assets limit.8 • If the applicant has retired and is receiving payments from his/her pension fund, the payments will be regarded as income rather than an asset. However, to be eligible for a DRO the applicant’s monthly disposable income must not exceed £75 (following deductions for tax, National insurance, and normal household expenses).
4.2 Increase in debt relief eligibility criteria - 2014
In August 2014, the Government called for evidence to review the way in which DROs had performed since their introduction in 2009.9 On 15 January 2015, Jo
6 Department of Business, Innovation and Skills, “The Insolvency Service Consultation: Debt Relief Orders and Pensions”, 23 March 2010, [not online] 7 HC Deb 9 November 2010 c7-8WS 8 There are some exceptions, so the debtor will need to check with an adviser if they want to apply for a DRO 9 Insolvency Service, Review of Debt Relief Orders and the bankruptcy petition limit, 6 August 2014 [not online]
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Swinson, then Parliamentary Under-Secretary of State for Business, Innovation and Skills (now BEIS), announced an increase in the DRO eligibility criteria. This was to allow more people to access debt relief. Specifically, the Government decided to increase the debt relief order eligibility criteria, the maximum debt level increasing from £15,000 to £20,000 and asset limit from £300 to £1,000. No change was made to the maximum level of surplus income allowed.
4.3 Increase in debt relief eligibility criteria – 2021
In January 2021, the Insolvency Service published a consultation, “Debt Relief Orders: Consultation on changes to the monetary eligibility criteria”.10 This consultation sought views on a proposal to increase the monetary eligibility limits of DROs, to give more people with low levels of assets and low income who are in problem debt access to a suitable and proportionate option for debt relief. It emphasised the importance of balancing the interests of both creditors and debtors. The consultation closed on 26 February 2021.
The Insolvency Service commented that most responses to the consultation had suggested that DROs should not be looked at in isolation, instead consideration should be given as to whether changes are needed to the wider personal insolvency framework.11 Therefore, the Government would be looking to issue a Call for Evidence on the whole personal insolvency landscape in due course.12 It was also announced that the Government would legislate to increase the number of people eligible for DROs, helping more people to get out of problem debt.13 A “Summary of responses and Government response” was published on 9 June 2021.14
On 29 June 2021 new monetary eligibility limits for DROs came into force.15 On the same day, the Insolvency Service published new guidance on “Getting a Debt Relief Order”. As outlined in section 2 (Box 2) of this paper, the changes to the criteria include:
• An increase in the threshold on the value of assets that a debtor can hold and be eligible to enter a DRO from £1,000 to £2,000. • An increase in the value of a single motor vehicle that can be disregarded from the total value of assets from £1,000 to £2,000.
10 Insolvency Service, “Det Relief Orders: Consultation on changes to the monetary eligibility criteria”, January 2021 (updated 9 Jane 2021) 11 Insolvency Service, “Debt Relief Orders”, 12 January 2021 12 Ibid 13 Ibid 14 Insolvency Service, “Consultation outcome – Summary of responses and Government response”, 9 June 2021 15 See the Insolvency (England and Wales) Amendment Rules 2021 (SI 2921 No. 672) and the Insolvency Proceedings (Monetary Limits) (Amendment) Order 2021 (SI 2021 No.673)
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• An increase in the level of surplus income received by the debtor before payments should be made to creditors from £50 to £75 per month. • Increase in the total debt allowable for a DRO from £20,000 to £30,000.
According to the Government, the expectation is that over 13,000 more people may use DROs in the next 12 months compared to 2019, an increase of nearly 50 per cent.16 Lord Callanan, Minister for Corporate Responsibility, said:
Debt Relief Orders help those with problem debt get to grips with their finances, these changes will enable more people experiencing problem debt to get a fresh start.17
Insolvency practitioners are under an obligation to ensure that people in financial difficulty enter the right solution for their individual circumstances and that, once implemented, it remains appropriate. The Insolvency Service has called on insolvency practitioners who supervise Individual Voluntary Arrangements (IVAs) to consider the impact of the changes to the DRO eligibility criteria on their portfolio.18 It said:
When determining when to review cases, insolvency practitioners should look at consumers’ individual circumstances in order to decide whether this should happen immediately or at their annual review. After consideration, if an IVA is no longer the best option for that consumer, they should be directed to appropriate advice and supported by their supervisor through any transition. If insolvency practitioners are unsure how they should approach particular cases, they should approach their RPB for advice.19
16 Insolvency Service, “New measures to help vulnerable people in problem debt”, 10 May 2021 17 Ibid 18 Insolvency Service, “Dear Insolvency Practitioner – issue 133”, July 2021 19 Ibid
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