Debt Relief Orders (DROs) set to soar as pension changes come into effect 6th April 2011
Great news for those over-indebted consumers as Edward Davey, Minister for Employment Relations, Consumer and Postal Affairs announces changes to the Debt Relief Orders to allow those debtors with approved pensions access to the DRO procedure.
Previously any debtor that had a pension fund worth £300 or more was excluded from proposing a DRO to their creditors, even if the pension is not receivable for many years.
The announcement follows a consultation launched in March this year, after debt advice agencies expressed concerns that DROs excluded some vulnerable people struggling with small debts.
The proposals which will come into force on 6th April 2011 will change the rules to allow approved pensions as defined under Section 11 (2) of the Welfare Reform and Pensions Act 1999. This means that the majority of occupational and personal pension schemes will now be accepted.
DRO qualifying criteria
A DRO is designed to provide a fresh start for the most vulnerable people trapped in debt. They must have unsecured debts below £15,000, disposable income of less than £50 per month and assets valued less than £300.
The DRO will help to place the least complicated debt discharge cases on a fast-track through the court system with no personal appearance at court required.
Pensions barred one in eight applicants
Initial estimates suggest that as many as one in eight people who met all other eligibility criteria for a DRO were unable to access the regime due to having a small pension fund in excess of £300.
DRO key stats
- In the period 6 April 2009 to 31 March 2010, there were 17,441 DROs granted in England & Wales.
- At 31 March 2010, there were 1,430 approved intermediaries available to assist debtors in applying for a DRO.
- The profile of debtors accessing DROs, in terms of age and location, is broadly in line with bankruptcy data. The incidence of women seeking DROs is, however, far higher than for men, a pattern which is the opposite of the profile for bankrupts.
- London and the South East had the lowest rates of DROs in England and Wales, whilst the South West and North East had the highest. This is in line with bankruptcy rates for the same regions in 2008.
- The profile of debtors accessing the DRO system would seem to be those types of individuals for whom the relief was intended, i.e. low income, predominantly unemployed, individuals.
- The total amount of debt scheduled in DROs to 31st March 2010 was £150.5 million.
- The majority of debt, over 53%, was owed to banks, building societies and credit card companies.
- The average number of creditors per DRO was 6.
- The average liability per creditor was £1,358.
- The average DRO level of debt was £8,700.
Disincentive to work for those on DROs
The main criticism of the DRO is that once it is granted then there is a natural disincentive for the individual to find employment. Under the eligibility rules for DROs the person must disclose if their circumstances and or income were to change over the 12 month period the order is in force.
If for example the individual were to find employment on month 11 of the DRO then this extra income may well mean that he/she is no longer eligible and the DRO may be revoked.
The concern would then be that he or she may only have sufficient money to pay priority creditors like rent and utilities but not the lenders that previously featured in the DRO.
I personally would like to see the qualifying criteria changed to widen the appeal to many other desperate and vulnerable consumers that would otherwise be rejected.
My recommendations would be to;
- increase the assets amount to around £3,000
- include homeowners that are in negative equity
- double the car amount to £2,000
- increase the disposable income level to £100
However, addressing these areas would probably push up the insolvency figures even further - so I shan’t hold my breath for too long...
