How will changes to the bankruptcy level and debt relief orders affect the personal insolvency landscape?

Will changes to the eligibility criteria make it easier for people to access debt relief orders (DROs)? Giles Frampton, president of R3, the association of business recovery professionals, considers how these changes will affect the personal insolvency landscape.

Original news

The minimum level of debt for which a person who is owed money can force another person into bankruptcy will be increased from £750 to £5,000, the Department for Business, Innovation and Skills has confirmed. In addition, the DRO eligibility criteria will be changed to increase the maximum debt level from £15,000 to £20,000 and the asset limit from £300 to £1,000. No change will be made to the maximum level of surplus income allowed. Statutory instruments have been laid to give effect to the changes from 1 October 2015.

What is the general impression of how DROs have performed since their introduction?

DROs have proven to be a useful addition to the personal insolvency landscape. Bankruptcy can be a good way of dealing with debts, but its consequences can be disproportionate for those with little or no assets and income and relatively low value debts. DROs are a quicker, easier, and more appropriate debt solution for those in this situation.

How do DROs operate and how can they assist vulnerable people?

DROs are open to those with fewer than £300 of assets (not counting those assets which are ‘excluded’), under £15,000 of debts, and less than £50 a month in spare income. If you’re subject to a DRO, creditors can’t recover their debts without the court’s permission and you’re usually freed from your debts after a year. While subject to a DRO, you can’t borrow more than £500 without telling the lender about your DRO or act as a company director, among other things.

What have been the challenges when using DROs?

The biggest problem with DROs has been their restrictive entry requirements. These can be exacerbated by the way bankruptcy works.

For those trying to access bankruptcy, a big hurdle is the up-front £705 entry fee (made up of court and administration costs). There are potentially thousands of people who can’t seek a DRO because they have too many assets or debts, but they can’t afford to enter bankruptcy either. Being caught between insolvency solutions like this means people can often struggle to deal with their debts.

According to the government, in 2012/13, the median unsecured debt in bankruptcies was roughly £38,000. Given that 50% of bankruptcies involve individuals with few or no assets, it’s reasonable to assume a fair proportion of financially distressed individuals have debts over £15,000 but few assets. Given their low level of assets, it’s reasonable to assume they couldn’t afford bankruptcy, but given their debts could not enter a DRO.

What is the significance of these increases?

The increases ease the entry requirements and will make it much easier for people to access a DRO. While R3 was hoping for increases in the asset limit to £2,000 and the debt limit to £30,000, the increases announced by the government are still welcome.

What is the thinking behind increasing the creditor petition limit for bankruptcy? What effect will this have?

While bankruptcy can be the most effective way for some people to deal with their debts, it is not appropriate in every situation—especially when debts are low in value or they have few assets.

Bankruptcy is a serious and life-affecting process. The threshold for creditor petitions is there to stop bankruptcy being used disproportionately as a debt collection tool for very low value debts. However, the threshold hasn’t been changed since 1986 and its value has been slowly eroded by inflation, reducing the protection it offers to debtors. Raising the threshold to £5,000 not only repairs this erosion but adds a degree of ‘future-proofing’.

How will this affect personal insolvency?

The raised creditor petition threshold should mean fewer bankruptcies. According to Insolvency Service analysis, 2,000 creditor petition bankruptcies in 2013/14 were for debts under £5,000—about 20% of all bankruptcies in the year. Rather than using bankruptcy petitions to pursue low value debts, creditors will have to rely on procedures like county court judgments or attachment of earnings orders.

On the other hand, the changes to the DRO limits mean there are likely to be more people eligible for them. The Insolvency Service estimates the changes will mean another 3,600 DROs a year.

Both changes are positive. There are a range of insolvency options for dealing with debts and they’re most effective when a debtor is in a debt solution most suited to their needs. The changes mean it is much more likely debtors will be able to end up in the right insolvency process for them.

Interviewed by Neasa MacErlean.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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First published on LexisPSL Restructuring and Insolvency

 

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