UK debt relief limits under review as economic impact of Covid-19 bites

Out-Law News | 27 Jan 2021 | 11:41 am | 3 min. read

The UK government is consulting on changing the eligibility criteria for debt relief orders (DROs) to make them accessible to more people ahead of an expected increase in demand for financial help.

The proposals would see the total amount of debt permissible to enter a DRO increase from £20,000 to £30,000. The value of assets owned by individuals accessing a DRO would increase from £1,000 to £2,000, and the level of surplus income from £50 to £100 per month.

DROs were introduced in 2009 as low-cost and accessible debt solutions to support vulnerable people. They protect debtors from creditor action and after 12 months all debt within the order is written off.

The consultation follows an announcement last year that the government would be introducing a breathing space scheme in 2021, to provide people in debt with a 60-day pause on creditor enforcement action while they access professional debt advice.

Financial services expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law, said a move to support vulnerable people chimed with work carried out by the Financial Conduct Authority (FCA) and a survey undertaken by Pinsent Masons on the interplays and considerations to be had between mental and financial health. The survey found that over-indebtedness may also be linked with experiencing mental health problems or addictions, and people with problem debt were twice as likely to develop major depression as those who are not in financial difficulty.

“Studies have shown that over-indebtedness may be linked with experiencing mental health problems or addictions. People with problem debt are twice as likely to develop major depression as those who are not in financial difficulty, and it can also be a contributing factor to anxiety and depression,” Cavill said.

“The FCA has explained in recent years how the industry should think about the challenges which vulnerable customers face, as well as in the last year setting out various directions to firms to support customers who may be struggling with the consequences of the pandemic. The government’s proposals support the work the FCA and financial services firms are carrying out in this area, and demonstrates that there is scope for continuous improvements to ensure fair treatment of those who need it most,” Cavill said.

The government said the uncertain economic outlook caused by the Covid-19 pandemic, and the upcoming introduction of the breathing space scheme, meant it was appropriate to consider whether the current DRO limits need to be changed.

It said the number of people obtaining a DRO in 2020 was lower than the same period in 2019 – largely due to a combination of greater forbearance being shown by the credit industry and government financial support related to the pandemic.

However, the Money and Pensions Service is forecasting a 60% increase in the number of people needing debt advice by the end of 2021, with around 3 million more people asking for help. Approximately 10% of the increase in demand is expected to come from people for whom currently bankruptcy is the only option for obtaining debt relief.

According to the government, increasing the asset, income and debt thresholds would result in around 15,500 more people being eligible for a DRO, a 58% increase on the number of individuals who obtained one in 2019/20.

The consultation suggested there would be a cost to creditors in a limited number of cases where an individual would be able to access debt relief, compared to an alternative solution which would have provided a distribution.

There would also be benefits to creditors from reduced administration and recovery costs. The government said in low asset and debt cases the actual debt recovered is likely to be very small and would generally exceed the cost of recovery, and writing off debt in these cases could result in a net benefit for creditors against the status quo.

Financial services expert Daniela Ivanova of Pinsent Masons said: “The breathing space scheme and the proposed changes to DROs to make them available to more people experiencing relatively low levels of unmanageable debt are timely measures that will tie in with the FCA’s coronavirus interventions in the financial services sector to help customers during these challenging times.

“In addition to treating vulnerable customers fairly and the considerations which ought to be given to the FCA’s vulnerable customer initiative, firms will need to adapt their processes to the Government’s measures and proposed changes to DROs if adopted,” Ivanova said.