Consultation outcome

Summary of responses and Government response

Updated 9 June 2021

Applies to England and Wales

1. Introduction

On 12 January 2021, the Government published a consultation on proposed changes to the monetary eligibility criteria for debt relief orders (DROs). DROs provide low cost and easy access to debt relief for individuals with relatively low levels of unmanageable debt, and no way to pay their creditors. In order to be able to obtain a DRO, a person must meet strict monetary eligibility criteria, alongside certain other non-monetary conditions (for example that they have lived or worked in England or Wales in the last 3 years). The monetary eligibility criteria have been unchanged since 2015. The consultation closed on 26 February 2021.

The Government proposed the following changes to the monetary eligibility criteria for an individual to access a DRO:

• To increase the total amount of debt allowable from £20,000 to £30,000;
• To increase the allowable value of assets owned by the individual from £1,000 to £2,000. The consultation did not propose any to change the items excluded from the calculation of assets nor did it propose any change to the £1,000 limit on the value of a domestic motor vehicle; and
• To increase the level of allowable surplus income to from £50 to £100 per month.

This document sets out a summary of the responses received, the Government’s response and next steps.

Executive summary

There were 148 written responses to the consultation. Officials also held meetings with key stakeholders from the debt advice community and from the creditor community. The Government was grateful for the positive engagement and has carefully considered all the responses. Whilst a majority of those responding supported the Government’s proposal to raise the monetary limits, the responses were generally polarised between two positions. Stakeholders from the debtor and academic communities put forward strong arguments for the Government’s proposed increases to the limits to go further, allowing more people access to DROs. They felt this would help address the possible impacts of the pandemic on individuals’ financial situations. Equally strong opposing arguments were put forward by the creditor and insolvency practitioner communities, that some of the proposed changes went too far. There were concerns that they could distort the personal insolvency regime by making DROs inconsistent with other insolvency solutions; and that the proposals undermined a core principle of the regime that those that can pay their debts should do so.

The Government has carefully considered these arguments and on balance has decided to make a number of changes to the original consultation proposals. Government intends to make the necessary legislation to effect the changes as soon as possible. The proposed changes will:

• increase the total amount of debt allowable to £30,000;
• increase the allowable value of assets owned by the individual to £2,000;
• increase the maximum potential realisable value of a single domestic motor vehicle which can be disregarded by the official receiver to £2,000; and
• increase the level of allowable surplus income to £75 per month.

The Government intends to commence these changes as soon as possible, with the aim that they will come into force before the end of the first 60-day breathing space procedure, which commenced on 4 May 2021.

Whilst welcoming the proposals for a change to the monetary limits, most responses also urged that the Government consider whether changes are needed to the wider personal insolvency framework, (which has evolved considerably over several decades) to ensure it supports a flexible and proportionate approach that works for our citizens. The Government recognises there have been significant changes in the personal debt and insolvency landscape over the years, with further changes planned – for example the breathing space scheme, followed later by the new statutory debt repayment plan – and will issue a Call for Evidence on the current personal insolvency framework in due course.

2. Responses to the consultation

148 responses to the consultation were received. 121 were from the debt advice sector, including 25 responses from individual debt advisers and one organised response which included 182 signatories. 16 responses were from organisations representing creditors or creditors themselves, 8 were from the insolvency practitioner profession and their trade organisation (R3) and 2 responses were from academics. There was also a response from the Civil Court Users Association.

Annex A lists all those that responded to the consultation.

During the consultation period, the Insolvency Service held virtual meetings with the debt advice sector, creditor organisations, the insolvency profession (including the trade body R3) and other Government Departments to discuss the proposals in more detail.

Questions from the consultation

Q1. Do you agree that changes to the eligibility criteria for DROs are necessary? Please state your reasons.

Almost all respondents agreed that change was necessary, many saying that it was long overdue. Many respondents also called for a wholesale review of the personal insolvency landscape. Respondents from both the professional debt advice and the creditor sectors called for changes to the DRO eligibility criteria to be considered as part of a wider review of the personal insolvency regime. Some felt that changing the DRO limits should not be considered in isolation to other tools within the personal insolvency framework. Creditor representatives felt strongly that the “can pay, will pay” ethos that has been the underlying principle of the personal insolvency framework for many years, should not be undermined and should be consistently applied across all the personal insolvency solutions available.

Other issues respondents said that they would like to see government resolve were:

Ability to add new debts after a DRO is made

After 12 months, a debtor is discharged from the debts that are specified in the order but not from other debts that may have been due at the date of the DRO and omitted from the schedule of debts that accompanies the order. To amend this would require a change to the Insolvency Act 1986 itself rather than the secondary regulations that are needed to change the monetary eligibility limits, therefore could not be considered within this consultation. Increasing the total debt limit to £30,000 does, however, provide further flexibility for the debt recorded as owed to a particular listed creditor, to be increased after the order is made, without fear of going over the debt level threshold.

Regular reviews of monetary limits

As with any policy, the Government keeps the legislative framework under review and will continue to do so.

Reducing the time gap before it is possible apply for another DRO

Currently and individual cannot apply for a DRO within 6 years of obtaining one. Some debt advice organisations have called for this to be reduced to 3 years or less, to enable people to have a fresh start where they have built up debt again through no fault of their own. This would require a change to primary legislation so is not being considered within this consultation.

Q2. Do you agree with the proposed increases to the debt (to £30,000), asset (to £2,000) and surplus income (to £100) levels? If not, what do you think they should be? Please state your reasons.

Debt level (proposed increase from £20,000 to £30,000)

Summary of Responses

The proposal to increase the allowable debt level was welcomed as a sensible approach by the professional debt advice sector, although the majority suggested either a £50,000 cap or no cap at all. They argued that the other two thresholds (assets and surplus income) would filter out all those that were able to pay something back to their creditors, leaving only those who would otherwise have to enter bankruptcy, which could be a disproportionate solution for many such cases.

“The debt level limit is the most significant obstruction to accessing a DRO and CAP strongly supports the proposal to raise this limit. However, £50,000 would be a more appropriate figure to make sure the DRO is accessible for the people it was designed for. More than a third (37%) of CAP clients who pursue only fail to qualify for a DRO because of the £20,000 DRO debt limit.”

Christians Against Poverty

The creditor sector and insolvency practitioners, however, felt that if any increase were to be made, it should not be above £25,000, which would be more in keeping with an inflationary rise. They felt that increasing the debt level above this changed the purpose of the DRO procedure and allowed individuals to write-off significant levels of debt with none of the scrutiny or oversight that come with bankruptcy.

“Pending a detailed overarching review of the current debt solutions to understand in more detail the barriers faced by consumers in accessing debt relief and identify the areas where additional support is needed, an increase in the debt limit to £25,000 might be more appropriate. The DRO is intended to support an efficient and cost-effective access to debt relief for individuals with relatively low levels of debt. £30,000 is not an insignificant level of debt, and whilst there will be circumstances where debt relief at that level is appropriate, whether that should be through the DRO process or another debt solution process should be more thoroughly assessed.”

UK Finance

Government Response

Given the range of opinion between the two major representative groups, the Government believes that £30,000 strikes the right balance. A significant rise to £50,000 would go against the “can pay, will pay” principle without the benefit of a wider consideration of the purpose and functions of the personal insolvency regime. Whilst a raise in the limit to £30,000 would represent an above inflation rise, when taken alongside the other proposed changes, it is a proportionate response that reflects the change in household debt levelsas set out in several different responses that were received, including as a result of the pandemic. The Government will however, explore this area further as part of its wider review of the personal insolvency regime.

Asset level (proposed increase from £1,000 to £2,000)

Summary of Responses

Almost all respondents agreed with the proposal to increase the total allowable asset threshold. Although a few responses suggested an increase in the range of £1,500 and £3,000, the overwhelming majority were either strongly in favour of, or accepting that, an increase to £2,000 was both reasonable and necessary. The debt advice sector recognised that most individuals looking for a DRO have very few assets and generally the biggest one they do have is a motor vehicle.

“Since the vehicle limit was set at £1,000, the price of vehicles has increased. Many of our advisers highlighted that the type of vehicle their clients could purchase for £1,000 would be older, less reliable and more costly in terms of maintenance and repair charges.”

Citizens Advice UK

Almost all responses from the professional debt advice sector proposed an increase to the motor vehicle value (as a disregarded asset) alongside increasing the asset threshold from £1,000 to £2,000. The suggested increase in value ranged from £1,500 to £3,000 with the majority supporting an increase to £2,000. The arguments put forward for increasing the value of the motor vehicle focused on the cost of a car having increased substantially since the level was last set in 2009 and that the costs of maintaining a very low value car are often higher.

Although the Government did not propose any change to the motor vehicle value, the consultation did ask the question whether respondents agree with the proposed limits and if not, what they would like to see instead. Within their answers to this question, a number of respondents added a comment about increasing the motor vehicle value as well as referencing it in answers to the final question (‘Are there any other comments you would like to make?’).

Some responses from the insolvency profession and the creditor community also support a change to the motor vehicle value, with suggestions ranging from between £1,300 to £4,000.

Government Response

The Government has therefore decided, as proposed in its consultation, to increase the total value of assets allowable from £1,000 to £2,000. Although it was not proposed in the consultation, the Government recognises and accepts the arguments put forward that an increase in the value of a motor vehicle that can be disregarded as an asset in a DRO should also be increased from £1,000 to £2,000.

The Government is also confirming in this response the way in which mobility scooters should be considered in the DRO process. Where an authorised intermediary is satisfied that the mobility scooter is necessary for satisfying the basic domestic needs of the debtor and its realisable value does not exceed the cost of a reasonable replacement, the value of the scooter will be disregarded by the official receiver when they determine the total value of the debtor’s property. This has been reflected in the A-Z guidance for authorised intermediaries.

Surplus Income (proposed increase from £50 to £100)

Summary of Responses

Increasing the allowable monthly surplus income threshold to £100 divided opinion between the professional debt advice sector and the creditor/insolvency practitioner organisations. Creditor organisations and the insolvency profession were strongly opposed to this level of increase. They argued that other insolvency solutions (for example individual voluntary arrangements (IVAs)) with £100 surplus income can result in a contribution back to creditors and therefore this change would lead to inconsistencies and represent a move away from the “can pay, will pay” principle. Creditors also argued that making this change could see the level of debt written off increase significantly, resulting in a possible tightening of lending criteria by the market – particularly at the vulnerable end. Creditors have generally indicated that they would be more accepting of an increase in line with inflation, estimates for which varied between £60 and £75 per calendar month.

In contrast the debt advice sector was very supportive of this change, with almost all responses agreeing that a rise in the surplus income threshold is long overdue (this criterion was not changed in 2015 when the other thresholds were raised). Most agreed that £100 was the right level.

Government Response

Given the range of opinion and the strong views expressed, the Government has decided that a smaller increase to £75 sets the right balance. This increase reflects a fair balance between those that can afford, and therefore should make, payments to reduce their debt, while allowing a certain level of surplus income to cover unexpected emergencies.

Q3. Do the proposed changes strike the right balance between ensuring that the most vulnerable individuals are able to access low-cost debt relief at the same time protecting the interests of creditors by maintaining the ‘can pay, will pay’ ethos? Would these levels of assets lead to a return to creditors in another debt relief solution? Please state your reasons.

Summary of responses

The majority of responses from the professional debt advice sector felt the changes struck the right balance between the interests of debtors and creditors. Generally, they argued these changes were of minor consequence to creditors, with assets of £2,000 being difficult to liquidate and an extra £50 surplus income being a trivial amount when paid over 3-5 years the costs of dealing with it are factored in. Many debt advisers also commented that most of the debtors they speak to have tried the “can pay, will pay” ethos before entering into a DRO.

“Yes, I believe it does strike the right balance here as debtors will not want to pursue this option unless it absolutely necessary, and indeed the checks carried out by the approved intermediary will always confirm it is necessary and proportionate for the client and creditors by extension, as the ability to pay in the future will not be there.”

Lee Melling MIMA (Cert), Cambridge CAB

The response from Professor Spooner of London School of Economics highlighted the difficulty in balancing the tangible benefits of household debt relief against the intangible concept of a “can pay, will pay” ethos by arguing:

“If concerns exist regarding moral hazard and damage to a repayment “ethos”, arguably the best response is targeted legal measures which address misconduct.”

Professor Spooner, LSE

Responses to this question from creditor organisations and the insolvency practitioner sector highlighted their concern that the £100 surplus income threshold was too high. They argued it went too far in favour of debtors, opening DROs up to many more who should not be classed as ‘vulnerable’. They also used their response to again draw attention to their concerns that in their view there was a risk that more stringent lending policies could be introduced as a result, leading to a reduction in options for people on lower incomes.

Q4. Do you think that Government should aim to implement and commence any changes to the monetary limits for DROs to coincide with the introduction of breathing space in 2021? Please state your reasons.

Summary of Responses

Most respondents were keen for any changes to come into force as soon as possible and align with the new 60 day breathing space scheme which was scheduled to commence in early May 2021 and was subsequently implemented on 4th May 2021.

Government Response

The Government recognises the desirability of introducing the proposals in conjunction with the new Breathing Space scheme and will aim to lay the necessary Regulations as soon as possible.

Q5. Do you think there are any other impacts that should be considered? Please state your reasons.

Summary of Responses

In answer to this question respondents raised a number of issues that have already been mentioned in response to questions 1 – 4. Additional points raised include:

• The impact the proposed changes could have on the debt advice sector operations in terms of workload, funding, training and compliance costs. Some mentioned that this will be significant and should be appropriately represented in the Impact Assessment, which will be published alongside the regulations in due course. The Institute of Money Advisers highlighted the administrative burden of reviewing all existing cases, training staff and inviting debtors back for further advice. One respondent pointed out that the extra work in additional DRO cases will be “offset by not having to spend time scrapping around for another debt solution or a grant. Or even time spent having to negotiate debt write off with creditors”.
• Concerns that the proposed surplus income rise to £100 per month could overlap with IVAs as a debt solution. The Government has taken account of these concerns in its response, increasing the allowable surplus income to £75 not £100 as initially proposed.
• Potential cost savings for Government in dealing with mental health issues of debtors and reduced costs of medical and social care. One respondent highlighted the positive impact this will have on families.

A number of suggestions were made by the debt advice sector to change the process of applying for a DRO, which is seen by some as burdensome, in order to reduce some of the time spent on each case. These included removing the requirement for a full financial statement where the debtor is receiving 100% benefit income and ignoring lump sum back-dated benefit payments if paid during the moratorium. Many of the suggested changes require amendment to primary legislation and these issues will be considered within a wider review of the personal insolvency landscape.

Q6. Are there any other comments you would like to make?

As well as the points raised above at Q1, there were a number of further elements of the DRO regime that respondents would like to see changed. These included:

A requirement to review all open cases that would now newly become eligible for a DRO

This included IVAs and bankruptcy applications, as well as an ongoing requirement to ensure debtors are in the most appropriate solution for their circumstances. Comments ranged from the debt advice sector pushing for Government to insist that providers review all current cases; to the IP community simply asking what Government was going to do. Some creditors said it should be essential for debt advisers and IPs to communicate with all debtors on their books.

It is right to ensure that debtors enter the right solution for their circumstances and that, once implemented, it remains appropriate. The introduction of “breathing space” is a big step towards ensuring that those in financial difficulty are provided with quality debt advice that helps them to find the best way to resolve their debt. Solutions such as debt management plans and IVAs are already subject to regular review requirements and we will be working with the insolvency sector to ensure that debtors remain in the most appropriate solution for them.

DRO Fee

There were suggestions that the cost for a debtor to obtain a DRO (£90) presents a barrier to many and means that they are not able to access the debt relief that they need. There were calls for the Government to consider temporarily waiving or reducing the fee, which echoed the finding in the Woolard review of the consumer credit market. It should be noted that the fee may be paid by instalments, starting from £5. This consultation was focussed on the monetary limits for eligibility for a DRO; however, the wider personal insolvency review will explore barriers to entry.

Impact Assessment

A final stage Impact Assessment will be published at the time the legislation is laid in Parliament. It is estimated that the planned changes set out in this response will lead to an increase of about 13,200 DRO cases in England & Wales. This would be an increase of 49% compared to cases in 2019. We consider that 2019 is a better reference point than last year, where the economy was subject to the unprecedented impact of the coronavirus pandemic.

An Equalities Impact Assessment has concluded that the legislation will not deliver a less beneficial outcome for any one group compared to others.

Annex A: List of respondents

Organisation or individual

1. Waterside Debt Advice
2. Citizens Advice Esher & District

3. Chelmsford CAB

4. Citizens Advice Bromsgrove and Redditch

5. Plymouth Focus Advice Centre

6. Chloe Carhart

7. Citizens Advice Wigan Borough

8. Community Money Advice

9. Money Advice Plymouth - Mark Poole

10. Citizens Advice Kensington & Chelsea

11. Dacorum Citizens Advice

12. Community Law Service

13. Southway Housing Trust

14. Crosslight Advice

15. Talking Money - Hari Ramakrishnan

16. Money Advice Plymouth - Teressa Cornish

17. Daniel Liggins

18. The You Trust- John Harvey

19. Citizens Advice South Somerset

20. The Project Birmingham

21. Chris Bone

22. South Tyneside Homes

23. Michael Waters

24. Melton And District Money Advice Centre

25. May Fairweather

26. CAB for Nuneaton & Bedworth and Rugby

27. Talking Money- Cheryl Swift

28. Money Matters Leicester- Nina de Salis Young

29. Talking Money- Nicky Cleverly

30. Talking Money- Dave Hamblin

31. David Ogden

32. Mike Reeves

33. Malcolm Blount

34. Covadvice

35. Citizens Advice Richmond

36. Elaine Wilkinson

37. Paul Archer

38. Marcus Davies

39. CAB Bradford

40. Saffron Resource Centre

41. CAB Pembrokeshire

42. CAB Stevenage

43. Portsmouth City Council

44. CAB Dudley

45. CAB Cambridge

46. CAB Bracknell

47. Money Advice Durham- Clare Whiston

48. Gibson Booth

49. Michelle Davis

50. CAB Tadley

51. Fiona Monk

52. Chris Balchin

53. Susan Conway

54. Ablewell Advice Walsall

55. Malcolm Smith

56. Louise Patterson

57. CAB Bridport

58. Suzie Payne

59. Francesca Seaford

60. Crosslight Advice- Bruce Connell

61. CAB Pembrokeshire

62. Wales & West Housing Assoc

63. CAB Havant

64. Salford City Council Welfare Rights and Debt Advice Service

65. Derby Homes

66. Peter Adams

67. Debt Camel

68. Tim Nightingale

69. Angelia Care Trust

70. CAB Wealden

71. CAB Bradford

72. CAB North Somerset

73. Sue Lucas

74. Sarah Ford

75. Richard J Smith & Co

76. Julie Shenton

77. Financial Services Consumer Panel

78. Perennial

79. David Simpson

80. CAB Uttersford

81. Grand Union Housing Group

82. Caerphilly County Borough Council

83. Birmingham City Council

84. Institute of Money Advisors

85. Advice NI

86. GW-FS

87. CAB Exeter

88. CAB Test Valley

89. CAB Stockton

90. CAB Halton

91. Christians Against Poverty

92. Angel Advances

93. CAB Leeds

94. Royal British Legion

95. Trinity Cheltenham

96. JP Morgan

97. CAB Devon

98. Creditfix

99. Evolve Servicing Limited

100. CAB Cardiff and Vale

101. Evangelical Alliance UK’s

102. CAB Reading

103. Stepchange

104. Intel Finance

105. AdviceUK

106. Financial Wellness Group

107. Equifax and TDX Group

108. ABCUL

109. LSE Department of Law- Dr Joseph Spooner

110. Debt Movement

111. UK Finance

112. Centre for Responsible Credit Ltd - “We are Debt Advisers” campaign, supported by 182 signatories

113. Money Advice County Durham

114. Citizens Advice.org.uk

115. British Parking Assoc

116. The Baptist Union of Great Britain, The Methodist Church and The United Reformed Church

117. Debt Free South West

118. NewDay

119. CAB South Tyneside

120. Payplan

121. LB Redbridge

122. Finance & Leasing Association

123. Professor Iain Ramsay

124. Money & Pensions Service

125. CAB Lewes

126. Chartered Institute of Credit Management

127. Chris Sanders

128. Brian Hardisty

129. Community Money Advice

130. The Charity for Civil Servants

131. Capital One

132. CAB Salford

133. Credit Services Association

134. PRA Group

135. R3

136. Specialist Debt Advice Service

137. Money Advice Trust

138. The Civil Court Users Association

139. Norris Green Debt Advice

140. CAB Coventry

141. Moneywise Credit Union

142. Institute of Revenues Rating and Valuation

143. Insolveny Practitioner Association

144. Mazars LLP

145. Debt Managers Standards Association Limited

146. Watch Portfolio Management

147. CAB Elmbridge (West)

148. CAB Stockport, Oldham, Rochdale and Trafford

149. Infinity Financial Inclusion Forum