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BRIEFING PAPER

Number 4982, 11 November 2019

Debt Relief Orders By Lorraine Conway

Contents: 1. Background 2. How DROs work in practice 3. DROs: advantages &

disadvantages 4. Recent initiatives

2 Debt Relief Orders

Contents Summary 3

1. Background 4 1.1 Consultation on the introduction of DROs 4 1.2 Intermediary Working Group 5 1.3 Legislation 5 1.4 Treatment of pensions 5

2. How DROs work in practice 6 2.1 Who can apply for a DRO? 6 2.2 How to apply for a DRO 7 2.3 What are the effects of a DRO? 8 2.4 What restrictions are placed on a person who is subject to a DRO? 9 2.5 Changes in the debtor’s circumstances 9 2.6 What happens when the DRO ends? 10

3. DROs: advantages & disadvantages 11 3.1 Advantages of a DRO 11 3.2 Disadvantages of a DRO 11

4. Recent initiatives 12

Cover page image copyright: Pound coins / image cropped. Licensed under CC0 Creative Commons – no copyright required

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Summary Introduced under the Tribunals, Courts and Enforcement Act 2007 (TCEA 2007), Debt Relief Orders (DROs) came into force on 6 April 2009. In a nutshell, a DRO is a way for a debtor to have his/her debts written off if they have a relatively low level of debt and few assets. To apply for a DRO, the applicant must satisfy strict eligibility criteria (see Box 3 below).

Assuming a debtor qualifies for a DRO, the order will freeze his/her debt repayments and interest for 12 months. During this time creditors cannot take debt recovery action without the court’s permission (i.e. there is a moratorium). At the end of the year, the debtor will be free of all the debts listed in the order provided his/her circumstances have not changed. In effect, debts are written-off (i.e. “discharged”); the debtor won’t have to pay them.

DROs are a cheaper option than going bankrupt. Another important benefit is that DROs are administrative rather than court-based; they are made by Official Receivers working in partnership with the professional debt advice sector.

In a nutshell, the aim of a DRO is to provide:

• a low-cost debt remedy aimed at the financially excluded who have relatively low liabilities, little surplus income and few assets;

• 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;

• a fresh start for vulnerable people trapped in debt.

It should be noted that a DRO is only available if the debtor lives in England, Wales or Northern Ireland. DROs are not available in Scotland. However, a Minimal Assets Process (MAP) bankruptcy offers a similar solution to Scottish debtors, but has different benefits, risks and fees associated with it.

This briefing paper summarises the main features of DROs with emphasis on the eligibility criteria.

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1. Background

1.1 Consultation on the introduction of DROs In 2004, the Department for Constitutional Affairs (DCA) produced a consultation paper, “A choice of paths: better options to manage over-indebtedness and multiple debt”, which sought views on options to help people deal with over-indebtedness, in particular, multiple debt.1

The DCA concluded that there was a group of vulnerable people who were financially excluded from any debt relief remedy (see Box 1 below). 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.

Box 1: Financial exclusion from debt relief remedies

Prior to the introduction of DROs, the main debt relief remedies were:

• individual voluntary arrangement (IVA)

• county court administration order

• a non-statutory debt management plan (DMP)

• 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) in order to make regularly payments to creditors. Given the debtor’s lack of assets, bankruptcy was a disproportionate response.

On 31 March 2005, the Insolvency Service published a consultation document, “Relief for the Indebted – An Alternative to Bankruptcy”, in which it sought the views of stakeholders on a proposed new DRO procedure2 (see Box 2 below). This consultation ended on 30 June 2005.

Box 2: DROs offered a solution

The consultation paper proposed a new non-court-based scheme of debt relief. A scheme that would be simple and relatively cheap to administer. It envisaged the debtor’s circumstances as follows:

“The type of person at whom the scheme is aimed cannot pay even a portion of their debt within a reasonable timeframe. Such people are often living on very low incomes, and whilst at the time they borrowed the money they had every intention of paying it back, they simply lack the means to do so.”3

[Department for Constitutional Affairs (DCA), ‘A choice of paths: better options to manage over-indebtedness and multiple debt’, 2004]

1 Department for Constitutional Affairs consultation paper, “A choice of paths: better

options to manage over-indebtedness and multiple debt”, July 2004, Paper number CP23/04, [online – archive document], (accessed 7 November 2019)

2 Insolvency Service. “Relief for the Indebted – An Alternative to Bankruptcy’, March 2005”, [not online]

3 Ibid

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1.2 Intermediary Working Group In December 2005, the ‘Debt Relief Order Intermediary Working Group’ contributed to the further development of a new DRO scheme. This group was made up of representatives from the debt advice sector and the Insolvency Service who met to discuss how the DRO scheme might work.

1.3 Legislation DROs came into force on 6 April 2009, created by section 108 of the Tribunals, Courts and Enforcement Act 2007.4 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).

1.4 Treatment of pensions Applicants for a DRO must satisfy strict eligibility criteria (see Section 3 below). Initially this included having assets of less than £300 in total (this threshold has now been raised to £1,000).

When first introduced, DROs were criticised for treating pensions worth over £300 as an asset, even where 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 system fairer.5 On 9 November 2010, in a Written Ministerial Statement, Edward Davey, then Parliamentary Under-Secretary for the Department of Business Innovation and Skills (now BEIS), announced plans to amend the eligibility criteria.6

On 6 April 2011, the eligibility criterion was duly changed to allow those with HMRC-approved pension schemes to have access to a DRO.

4 Specifically, Schedules 17 to 20 of the Tribunals, Courts and Enforcement Act 2007

now inserted into the Insolvency Act 1986 5 Department of Business, Innovation and Skills, “The Insolvency Service Consultation:

Debt Relief Orders and Pensions”, 23 March 2010, [not online] 6 HC Deb 9 November 2010 c7-8WS

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2. How DROs work in practice

2.1 Who can apply for a DRO? 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 fit certain criteria to qualify (see Box 3 below). They can only apply for a DRO through an approved organisation (such as Citizens Advice or the StepChange debt charity).

Box 3: Eligibility criteria for a DRO:

To be eligible for a DRO, the applicant must currently satisfy the following strict eligibility criteria:

• the debtor is unable to pay his/her debts; • the debtor’s total unsecured liabilities must not exceed £20, 000 (these debts must be of a

certain type – see below);

• the debtor’s total gross assets must not exceed £1000; 7

• the debtor’s disposable income, following deduction of normal household expenses, must not exceed £50 per month;

• the debtor must be domiciled in England or Wales, or in the last 3 years have been resident or carrying on business in England or Wales; and

• the debtor must not have previously been subject to a DRO within the last 6 years. Only certain types of debt (“known as “qualifying debts”) can be included in a DRO.8 Qualifying debts include:

• credit cards, overdrafts, loans

• rent, utilities, telephone, council tax

• benefit overpayments and social fund loans • hire purchase or conditional sale agreements

• “buy now – pay later” agreements.

Most 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 “excluded debts” include:

• court fines and confiscation orders (these are 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

7 If the debtor owns a car it cannot be worth more than a £1,000 8 A person will not be eligible for a DRO if they are involved in bankruptcy proceedings

or any other formal insolvency procedure. If a creditor has petitioned for a debtor’s bankruptcy, the debtor may ask the creditor for permission to apply for a DRO instead

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• 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.

As mentioned in Section 1.4 of this paper, the eligibility criterion was changed on 6 April 2011 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 £1,000 assets limit.9

• 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. This is significant because to be eligible for a DRO the applicant’s monthly disposable income must not exceed £50 (following deductions for normal household expenses).

In addition to this strict eligibility criteria, the debtor must not be involved in another formal insolvency procedure at the time of making his/her application for a DRO (see Box 4).

Box 4: Formal insolvency procedures which exclude a DRO application:

The debtor must not be involved in another formal insolvency procedure at the time of making his/her application for a DRO. A formal insolvency procedure would include any of the following:

• 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); 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).

2.2 How to apply for a DRO DROs are administrative rather than court-based, the DRO is made by an Official Receiver. An applicant can only apply for a DRO with the assistance of an “approved intermediary”. An approved intermediary means a trained debt advisor who has been approved to act as an intermediary by a “competent authority”.10 In practice, debtors usually apply for a DRO online, with an approved intermediary helping them to complete the application form.

Upon receipt of the application and payment of a fee, an Official Receiver can make the DRO administratively, without the involvement of 9 There are some exceptions, so the debtor will need to check with an adviser if they

want to apply for a DRO 10 A list of approved intermediaries should be available at Citizens Advice offices

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the court. However, the Official Receiver is also able to refuse to make an order or can choose to delay the decision pending further information from the applicant.

It is also important to note that a debtor is only able to apply for a DRO once every 6 years.

2.3 What are the effects of a DRO?

Box 5: The 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 period that an order is in force, the debtor is:

• protected from any enforcement action by the creditors (except for (i) certain creditors whose debts cannot be scheduled in the DRO (i.e. “excluded debts”) and (ii) those creditors whose debts are included in the DRO but who have successfully obtained permission from the court to pursue their debts);

• obliged to provide information to and co-operate with the Official Receiver; and

• expected to make arrangements to repay their creditors should their financial circumstances improve.

As with other forms of personal insolvency, a person’s credit rating will be affected by the making of a DRO and there will be civil and criminal penalties for those who abuse the system.

As outlined in Box 5, there are certain things the debtor must not do before they apply for a DRO or during the life of the DRO. These include:

• hiding, destroying or faking any books or documents up to one year before they apply for a DRO and during the DRO;

• not telling the Official Receiver of any change in their circumstances that would affect their application between making the application and the order being granted; or

• giving away or selling things of value for less than they are worth to qualify for a DRO.

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

Debt Relief Restrictions Orders

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will extend the restrictions placed upon a person under a DRO for a period up to 15 years (see below). In more 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.

2.4 What restrictions are placed on a person who is subject to a DRO?

For the duration of the DRO (usually 12 months), the debtor will be subject to similar restrictions as a bankrupt (see Box 6).

Box 6: 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 (directly or indirectly) in a name that is different from the name under which they were granted a DRO, without telling all those with whom the debtor does business the name under which they were granted a DRO; and

• 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.

In addition, the debtor’s details are published on the Insolvency Service Individual Insolvency Register. It is a criminal offence to break the restrictions – the debtor might be prosecuted if they do.

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:

• 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;

• any increase in the debtor’s income;

• any 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).

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.

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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.

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3. DROs: advantages & disadvantages

Some of the benefits and disadvantages associated with DROs are listed below. 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 As outlined above, a DRO is a way to have debts written-off if the debtor has a relatively low level of debt and few assets. 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 (such as Citizens Advice or Step Change) 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 the 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 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 less than £20,000 and lives in England, Wales or Northern Ireland;

• a debtor cannot apply for a DRO if they're a homeowner;

• 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); and

• 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).

It is also important to note that 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. Recent initiatives In August 2014, the Government called for evidence to review the way in which DROs had performed since their introduction in 2009.11 On 15 January 2015, Jo Swinson, then Parliamentary Under-Secretary of State for Business, Innovation and Skills (now BEIS), announced an increase in the DRO eligibility criteria. These changes took effect on1 October 2015. The Minister outlined the Government’s position in the following Written Statement:

The responses to both the call for evidence and the survey of users showed that debt relief orders are thought to be working well and have provided an important additional route for debt relief for vulnerable people, with benefits for mental health and family relationships as well as allowing a fresh financial start.

Following the call for evidence, it was apparent that it was widely believed that some of the limits on debt relief orders needed to be increased. Bankruptcy is considerably more expensive than applying for a debt relief order and I was made aware that there may be people who are unable to apply for bankruptcy but have very low assets and income and creditors would therefore not be likely to receive any payment.

The Government have therefore 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. This will allow more people to access debt relief. No change will be made to the maximum level of surplus income allowed.

[…]

I am today laying statutory instruments to give effect to these changes from 1 October 2015.

We also received a number of helpful suggestions relating to how the debt relief order process works. We will ensure that those at risk of violence are sufficiently protected when applying for a debt relief order. We will also undertake some monitoring to ensure consistency on process between competent authorities who assist debtors in their applications. We will provide more options of how payments can be made when applying for a debt relief order. We are also contributing to work to ensure common guidance across all financial organisations with regards to how surplus income is calculated for different debt relief purposes, ensuring fairness and transparency.

It is important to me to ensure that those who require debt relief have access to it, while taking account of creditors’ interests, and that creditors’ powers to collect debts are set appropriately. These policy changes will ensure that this is the case, and this will continue to be monitored and a review will be carried out after two years of operation.12

11 Insolvency Service, Review of Debt Relief Orders and the bankruptcy petition limit, 6

August 2014 [not online] 12 HCWS 189

BRIEFING PAPER Number 4982 11 November 2019

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