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Good news with the proposed DRO reforms, but they still have one major fault

Friday, 16th January 2015

It’s heartening to see that The Insolvency Service consultation with the debt management industry has been rewarded with improvements to the working of Debt Relief Orders (DROs) with the key changes being increasing the maximum amount of unsecured debt that can be included in a DRO from £15,000 to £20,000. Although many debt counsellors have been calling for a maximum level of £30,000 this is a start and welcomed news as this move alone is expected to enable an additional 3,600 more people access to the debt remedy instead of the more arduous bankruptcy process.

Another positive move is the increase in the limit for value of assets, this will be raised from £300 to £1,000 and the vehicle will remain unchanged at a maximum value of £1,000.

So what exactly is a DRO?

The Debt Relief Order (DRO) was introduced in 2009 to help the least complicated debt cases be discharged on a fast-track through the court system with no personal appearance at court required.  This will also apply to the standard consumer bankruptcy sometime next year.

A DRO is designed to provide a fresh start for the most vulnerable people trapped in debt. Under the current qualifying criteria set some 11 years ago a debtor’s unsecured debts have to be below £15,000, their disposable income less than £50 per month, they must not be a house owner, even in negative equity, and their assets must be valued less than £300.  In my view a DRO is mainly appropriate for the unemployed, those unable to work and on long term benefits.

What is the major fault with a DRO?

What not has been addressed is the natural disincentive for an individual on a DRO to find employment or improve their circumstances.

Under the eligibility rules for DROs the person must disclose if their circumstances and or income change over the 12 month period the order is in force.

If for example the individual were to find employment or receive a rise in their income at any time during the 12 month period of the DRO then this extra income may well mean they are no longer eligible and their DRO may be revoked. So why bother to improve your situation?

My recommendations

I would have liked to have seen the qualifying criteria changed to widen the appeal to help many other desperate and vulnerable consumers that would otherwise be rejected.

My recommendations would be;

  • Double the ceiling level of unsecured debt of £15,000 to £30,000
  • increase the assets amount from the new proposed level of £1,000 to £3,000
  • include homeowners that are in negative equity
  • double the car amount to £2,000
  • increase the disposable income level from £50 to £75.

There is an argument to increase the current £90 fee, not by too much, say to £120 just to release additional funds for any investigation work and time costs for an adjudicator to scrutinize applications to ensure it is correct and above board, in particular for valuing assets and reviewing the debtor’s position during the period of the DRO.

 

 

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