Bankruptcy & Debt Relief - Pros and Cons of Using a DRO in Practice

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1 Consultation response: Insolvency Service-DROs & the bankruptcy petition limit Response by the Money Advice Trust Date: OCTOBER 2014

2 Contents Page 2 Page 3 Page 4 Page 7 Contents Introduction / About the Money Advice Trust Introductory comment Responses to individual questions Insolvency Service-DROs & the bankruptcy petition limit 2

3 Introduction About the Money Advice Trust The Money Advice Trust is a charity founded in 1991 to help people across the UK tackle their debts and manage their money wisely. The Trust s main activities are giving advice, supporting advisers and improving the UK s money and debt environment. We give advice to around 140,000 people every year through National Debtline and around 30,000 businesses through Business Debtline. We support advisers by providing training through Wiseradviser, innovation and infrastructure grants. We use the intelligence and insight gained from these activities to improve the UK s money and debt environment by contributing to policy developments and public debate around these issues. We help approximately one million people per annum through our direct advice services and by supporting advisers through training, tools and information. Public disclosure Please note that we consent to the public disclosure of this response. Insolvency Service-DROs & the bankruptcy petition limit 3

4 Introductory comment We welcome the Insolvency Service call for evidence on debt relief orders and the bankruptcy petition limit. The existing debt solutions landscape has developed over time with new options added, and eligibility criteria and threshold levels changing how people qualify for help. At the same time we ve seen the type of debt problem we are dealing with change. More people are contacting us now who struggle with essential living costs and household bills. Overall the average level of debt our clients are expressing concern about has declined, but people are contacting us with more intractable debt problems. 1 We are of the view that it would be an appropriate time for a full independent review of the debt solutions available, how they interact and how they are funded. This should be carried out as part of a wider project once the changes we are calling for in relation to DROs have been implemented. The changes to DROs are urgently needed to enhance the ability of our clients to obtain debt relief. A DRO is the best mechanism we currently have to achieve this aim. A) Debt Relief Orders Debt Relief Orders (DROs) have now been in place for 5 years, and have been a vital addition to the debt landscape. We believe that in general DROs are working really well and have helped thousands of clients find a long-term solution to their debt problems which has enabled them to make a fresh start. As a Competent Authority, National Debtline s DRO team has successfully submitted thousands of DRO applications to the Insolvency Service since DROs were introduced. 2 In shaping our response we surveyed 200 National Debtline client cases and conducted 30 telephone interviews with clients who have successfully completed a DRO. Clients felt overwhelmingly that the DRO had a positive impact on their wellbeing and relieved their stress levels. The change to the policy on DROs and pensions introduced in 2011 has also had a big impact, ensuring more clients can now access this option that would have previously been excluded. In terms of practice, the online application has been vastly improved since the first version was introduced and is now much easier to use and navigate. We understand that the Insolvency Service have a finite budget so it s been difficult to improve the system as quickly or efficiently as we all would have liked. However, there are areas that need to be reviewed. We have set these out in detail in answer to the specific questions below. DROs were originally intended to mirror bankruptcy, but there are an increasing number of ways in which they do not do so. This causes confusion for all parties and extra work for intermediaries to navigate an ever more complex landscape In 2013 National Debtline submitted 1,332 DRO applications. In 2012 National Debtline submitted 1,256 DRO applications. Insolvency Service-DROs & the bankruptcy petition limit 4

5 The changes that we consider are needed include the following. An increase in the maximum debt level: We believe the maximum debt level should be increased to 30,000 to enable people with little or no assets or available income to enter into a DRO who otherwise would not be able to afford the bankruptcy fee. An increase in the asset level: We also strongly suggest that the asset level should be increased to 2,000 which we feel is a more realistic figure fully reflecting the needs of modern-day households. The car value threshold should also be increased to 2,000 so that clients have more chance of keeping a reliable car. This will also have the effect of reducing ongoing maintenance costs from their expenditure. The asset level unfairly impacts on small businesses who are largely excluded from access to a DRO because business assets exceed the current assets level. Automatic updates index-linked to inflation: We would suggest that once the asset level and maximum debt level have been addressed, that any future uplifts are built into the system. There should be an automatic updating mechanism index-linked to an objective measure of inflation. Preference payments should be addressed: We strongly suggest that the issue of preference payments is addressed so that it mirrors what happens in bankruptcy and does not result in the DRO being declined or revoked, but restrictions imposed instead in appropriate cases. On average, we have to turn away nearly 5% of our clients who, once we have probed their situation, are found to have preference issues. In many cases we will point them towards bankruptcy as an alternative option. However, many of these clients cannot afford the bankruptcy fee. Clarity on grey areas: There are also many grey areas such as the treatment of rent arrears. Feedback from our clients indicates there are a number of varying approaches being adopted creating confusion amongst advisers, courts and landlords. o Are social housing providers simply writing off the arrears or insisting clients pay, threatening possession on other grounds? o Are district judges agreeing to suspended possession orders being varied to on-going rent plus a nil payment towards the arrears or are they issuing outright possession orders? Increased visibility of DROs as a debt option: We feel more could be done to publicise the availability of DROs and how to access free debt advice services which can offer a DRO because they have approved intermediaries in place. The visibility of DROs needs to be improved. It would be the preferred debt option for many people as it provides long-term relief from debt problems without the greater effect of bankruptcy in relation to the impact on clients and in relation to fees and costs. The invisibility of DROs is exacerbated by the fact that many debt management companies do not promote them as a debt option as there is little financial benefit for them in doing so. Insolvency Service-DROs & the bankruptcy petition limit 5

6 . B) Creditor petitions in bankruptcy Increase in the creditor petition limit in bankruptcy: We strongly support an increase in the creditor petition limit in bankruptcy. This has not been increased since 1986 and this has led to instances where people have been made bankrupt for very small debts. We suggest the level should be increased to an amount that deters creditors from taking the drastic step of issuing bankruptcy proceedings against an individual for what can start as a small initial amount but can spiral out of control once other debts, fees, and costs of bankruptcy are factored in. The use of bankruptcy in such cases is a disproportionate response, especially where someone ends up losing their home for the sake of a small initial debt. On balance we would favour a limit of 5,000. This would deter creditors from threatening bankruptcy when they do not really mean it. It should also deter creditors from issuing statutory demands with such frequency and using the threat of bankruptcy for small debts when there is no intention to do any more than intimidate the client. Encourage affordable repayments using existing mechanisms such as CFS: More should be done to persuade creditors to use the mechanisms in place to agree affordable repayments such as accepting offers based on the Common Financial Statement. Where recovery action is taken this should be through less drastic mechanisms such as the county court, and where there are assets such as a home, then through the use of charging orders as a last resort. Treating people fairly: Increasing the bankruptcy limit will also have the effect of preventing creditors from treating their customers unfairly, by taking disproportionate action. Costs of bankruptcy: Further thought should be given to amending the bankruptcy rules to allow for a mechanism to halt bankruptcy proceedings where the debt owed to the originating creditor can be cleared in full without incurring the full costs of the bankruptcy. Insolvency Service-DROs & the bankruptcy petition limit 6

7 Responses to individual questions Question 1 When responding can you please indicate the size of your organisation (not applicable to individuals). This will be useful for any impact assessment. Sizes of organisation are divided into:- 0-9 employees = Micro; = Small; = Medium; 250+ = Large Money Advice Trust would be classed as a medium sized organisation according to your criteria. Money Advice Trust runs National Debtline, Business Debtline, WiserAdviser and a range of support services for the sector. Question 2 What level do you think the maximum debt amount should be set to and why? We think the maximum debt level should be increased as the current debt threshold of 15,000 acts as a barrier to entry for many vulnerable people who would benefit from access to a DRO. The R3 report into the Personal Insolvency Landscape 3 proposed an upper limit of 30,000 which we would agree with. For clients who have minimal assets, no surplus income and no realistic prospect of this situation changing in the short to medium term then the only other option is bankruptcy which most clients in this situation cannot afford due to the high costs involved. A limited few may be able to get charitable assistance with the bankruptcy fee but for the remainder there is no other route for them to take. This means that their debts continue to spiral out of control and their situation becomes even more hopeless. There are a large numbers of bankruptcy cases over 50% according to the R3 report which have few or no assets. These are cases where the individual s assets are insufficient even to meet the Official Receiver s costs for administering the case, meaning that any possibility of distribution to creditors is out of the question. Subject to the need for debts beyond a certain level to be subject to investigation, it would seem preferable for such cases to go through the DRO procedure, with less of a cost to both the individual and the taxpayer. Increasing the threshold would also enable those who could not afford to go bankrupt to access an alternative form of debt relief and therefore be financially rehabilitated. Clients with debt levels above the 30,000 threshold would be subject to more thorough investigations by the Official Receiver. Creditors may be opposed to the raising of the threshold, but in the long run it should prove to be more cost effective for them in the majority of cases. Eligible clients would not have the means to pay them back and it would reduce creditors costs in trying to recover the money 3 dscape_jan_2014.pdf Insolvency Service-DROs & the bankruptcy petition limit 7

8 from clients through debt collection and court costs plus additional interest and penalty charges that will not be recoverable. Clearly, where there is evidence of any reckless behaviour by clients, the Insolvency Service should make sure that the possibility of a Debt Relief Restriction Order should be explored. This should give creditors adequate safeguards that any valid creditor objections in particular cases will be taken seriously. We looked at 200 of our existing National Debtline client cases in August 2014 where a full budget had been completed and debt options discussed. Our sample excluded those who lived in a mortgaged property. Our client profile for the total amount of debt is set out below. We believe our findings support our case for increasing the debt level for DROs. All other things being equal, 98% of this sample of our clients would qualify for a DRO if the debt level was set at 30,000. This would mean that many more clients who we think would benefit from a DRO would become potentially eligible. Total debt level Bands Totals Under 15, ,000 to 20, ,000 to 25, ,000 to 30, , Our DRO team also supplied case studies to illustrate the difficulties clients have where they are unable to qualify for a DRO due to their level of debt. National Debtline case study 1: reasons to raise the maximum levels Client applied for a DRO. She is a full-time carer for her disabled husband. They have one dependent child. They are in receipt of purely benefit income and there is no likelihood of this changing in the foreseeable future due to her husband s care needs. They are struggling with day-to-day expenses and are now having to pay towards their rent as their Discretionary Housing Payment has been withdrawn this is in dispute. The client applied for a DRO but when the Intermediary went through her appointment and reviewed her credit file it became apparent that her total debt level was in fact approximately 18,000 and therefore she was not eligible for a DRO. The case was discontinued and bankruptcy advice was given but the client does not have the capacity to save the fee. She was distraught. She is going to apply to various charities for the bankruptcy fee but she unsure if she will be successful. National Debtline case study 2: reasons to raise the current maximum levels Client is widowed with 3 dependent children. She works 16 hours per week and receives working tax credit and child tax credit and she gets some help towards her housing costs. She cannot work any extra hours due to childcare issues. The client has multiple debts including rent arrears, council tax arrears, electricity and tax credit arrears and numerous credit cards and loans. She has had issues since her partner died and has been really struggling to cope. She applied for a DRO and appeared to meet the criteria. However, during the process 2 new debts came to light which meant that her debts were now in excess of 15,000 and she was no longer eligible for a DRO. The client was very upset and could not afford the bankruptcy fee as she was struggling to make ends meet. She was advised on applying to charities for possible assistance with the bankruptcy fee but she may not be successful which means her situation will only become more and more desperate. Insolvency Service-DROs & the bankruptcy petition limit 8

9 Question 3 Do you think there should be a minimum limit of debts? We think it is difficult to impose a minimum debt level. A 1,000 lower limit on the face of it could appear sensible but we would suggest that there are a small number of clients in hopeless situations who would never be able to repay even this amount and therefore would have no access to debt relief. The number of cases we have submitted with debt levels below 1,000 have been extremely low. However, taking all things into consideration we do not believe there should be a minimum debt limit for DROs as this would only serve to reduce access to debt relief for those in the most vulnerable situations. National Debtline case study 3: reasons to avoid setting a minimum level An elderly client with a disability applied for a DRO. She had barely enough money for food each month and was struggling to live day-to-day. She had a debt totalling 800 with one creditor who was refusing to write off the debt. The client was very distressed about this debt and the worry was making her ill. She successfully applied for the DRO and the debt has now been written off. If a lower limit was put in place then it is unlikely this debt would have been written off as this client would not have been eligible to apply. Question 4 What level do you think the maximum asset amount should be set at and why? The current maximum asset limit for gross assets of 300 is set far too low. It is totally unrealistic to expect households not to own one or more computer, mobile or smart phone or a tablet. Such items are now considered part of everyday life. A recent Ofcom study found that telephone services, in particular mobiles, and internet access were most essential to UK consumers. 4 The move to digital by default means that it is extremely difficult to access services without digitally enabled devices. Such items are even more essential for those who are disabled and may be unable to leave the house, who are dependent on others and are feeling isolated. They are also essential for those seeking work and also for those claiming benefits, especially with the forthcoming changes to universal credit and the fact that claims have to be made online. There are also many occasions where a client has an item of jewellery, such as an engagement ring, that is individually worth more than 300. This has an unquantifiable emotional value but currently would preclude the client from access to a DRO. The current gross asset limit prevents many vulnerable clients from having access to a DRO where a DRO would be of great benefit. We would support the points made in the R3 report which states as follows: 2,000 is the point at which the OR begins to apply the Secretary of State fee to bankruptcy cases. This fee goes towards subsidising cases under this level, which are unable to cover the cost of their own administration as they have few or no assets to realise. Increasing the DRO asset threshold to 2,000 would increase access to DROs, whilst reducing the number of bankruptcy cases requiring cross-subsidy from those cases with realisable assets. 4 Insolvency Service-DROs & the bankruptcy petition limit 9

10 We suggest that the Minimal Asset Process asset limits that will apply in Scotland from April 2015 should be considered for adoption for DROs. The Bankruptcy and Debt Advice (Scotland) Act 5 sets out the asset rules under Section 5 (1) as follows. c) the total value of the debtor s assets (leaving out of account any liabilities) on the date the debtor application is made does not exceed 2000 or such other amount as may be prescribed, (d) the value of a single asset of the debtor does not exceed 1000 or such other amount as may be prescribed, (e) the debtor does not own land,.. This would have the effect of increasing access to DROs whilst also reducing the number of bankruptcy cases requiring cross-subsidy from those cases with realisable assets. We also feel that the 1,000 maximum vehicle value is set too low. It is almost impossible to get a reliable car for less than 1,000. There is the likelihood of a significant increase in maintenance costs for cars of such a low value. For many of our clients a reliable car is essential for getting to work and for transporting children. This is particularly the case for those in rural areas, people with mobility problems, and for those working shifts at unsociable hours. We would suggest a maximum level of 2,000 would be more appropriate and realistic. We looked at 200 of our existing National Debtline client cases in August 2014 where a full budget had been completed and debt options discussed. Our client profile for assets is set out below and excludes those in mortgaged property. We believe our findings support our case for increasing the asset level for DROs. All other things being equal, 94.5% of our clients would qualify for a DRO if the asset level was set at 2,000. This would mean that many more clients who we think would benefit from a DRO would become potentially eligible. Assets level Bands Totals Zero assets 141 Under to , ,001-2, ,001-3, , Our DRO team also supplied case studies to illustrate the difficulties clients have where they are unable to qualify for a DRO due to their level of assets. 5 s4-aspassed.pdf Insolvency Service-DROs & the bankruptcy petition limit 10

11 National Debtline case study 4: case for increasing the maximum asset level Client is single and working full time. She is on a low income and struggling to make ends meet. She has 13,000 debt with multiple creditors. She has no surplus income. She applied for a DRO but when the intermediary went through the online application, the client advised she had shares worth approximately 500 which she could not do anything with for four years. Her application was cancelled as she now exceeded the 300 asset limit even though should was unable to use this asset in the foreseeable future and it would not have any real impact on her debts The client is going to see if she can get help from family and friends for the bankruptcy fee. National Debtline case study 5: case for increasing the maximum asset level Client is living with her partner with two dependent children. Partner is disabled and she cares for him and their children. They are in receipt of benefits. She has incurred debts totaling approximately 10,000 since her partner was no longer able to work. She does not see their situation improving in the near future. The client is extremely stressed and the debts and the constant contact from her creditors is making her ill. They are really struggling to make ends meet. During the DRO appointment the intermediary established that the client had an engagement ring worth 500. It was a family heirloom. She did not want to sell due to emotional attachment and so did not see selling it as an option. The DRO application was cancelled and the client will try to apply for charitable assistance for the bankruptcy fee. Question 5 What level do you think the surplus income amount should be set at and why? We think that the current 50 surplus income amount should remain in place for DROs. This is worked out using the mechanism provided by the Common Financial Statement (CFS). 6 The CFS allows for realistic figures for a household to budget to. This includes trigger figures for certain bundles of household expenditure that are subject to inflation such as housekeeping and travel. The trigger figures are calculated using research from the Government s Living Costs and Food Survey (previously known as the Family Expenditure Survey). The Costs and Food Survey is based on a random sample of lower-income UK households produced by the Office for National Statistics. The trigger figures are reviewed annually and published in April. Interim changes to the figures may be made if there is a significant increase within any expenditure category. There are moves to develop a revised CFS alongside the Money Advice Service who will be consulting shortly on the inclusion of a savings element within the revised CFS. This would allow clients to set aside a small regular amount from their budget to cover emergencies and so on. This would be taken into account before the 50 surplus income amount is calculated. This should have the effect of clients who are better protected against unexpected expenditure items, less likely to incur further debts and to allow more flexibility within their budgets. We are also strongly supportive of developments that will allow a common budgeting tool such as the CFS to be used for both DROs and bankruptcy and across the debt sector as a whole. This would ensure consistency and achieve a more appropriate balance between the interests of people in debt and their creditors. This being the case it would also seem sensible to increase the permitted surplus income level for an Income Payments Arrangement (IPA) to 50. Collecting small amounts of money from people subject to an IPA cannot be cost effective for the Insolvency Service. 6 Insolvency Service-DROs & the bankruptcy petition limit 11

12 Also there is no room in the client s budget to account for emergencies if the IPA limit is set at 20. We looked at 200 of our existing National Debtline client cases in August 2014 where a full budget had been completed and debt options discussed. Our sample excluded those who lived in a mortgaged property. Our client profile for surplus income is set out below following an extensive budgeting process using the CFS. We believe our findings demonstrate the high proportion of our clients who have a deficit or negative available income or an available income of below 50 a month. This means that all things being equal, 56.5% of National Debtline clients would qualify for a DRO if the surplus income level remains at 50 a month. Where clients have a surplus income of more than 100 a month, there are likely to be more appropriate debt options available. Surplus income Bands Totals Negative or zero surplus income plus 64 Question 6 Do you think additional costs of the competent authorities should be covered by the application fee? If so, how much and why? We do not believe the additional costs should be covered by the DRO fee. This would just exclude more people who are already struggling to find the 90 fee and who have no assets or spare income. Such a move would essentially mean that the charitable debt advice sector would be effectively charging their clients an extra amount to cover their services. This is not acceptable to debt advice charities. The extra costs that have been identified by competent authorities in relation to processing a DRO case, needs to be acknowledged and addressed through additional funding resources. We have supplied the Insolvency Service with confidential details of the costs of running the DRO service incurred by Money Advice Trust. Question 7 Do existing payment systems provide sufficient coverage to enable debtors to pay the fee? If not, what other payment systems should be added? The existing payment methods do provide good coverage. However, it would be useful if clients could access PayPoint, pay online, and use a debit card over the phone. These additional payment methods would be helpful and increase the accessibility of payment systems. Insolvency Service-DROs & the bankruptcy petition limit 12

13 Question 8 Do you consider the six year restriction is appropriate? If not, please provide reasoning for an alternative. We do consider the six year restriction to be appropriate in most cases. However, if a client has had their DRO revoked, perhaps due to a change in circumstances, then this precludes them from applying again for another six years even though in effect they have not had the benefit of the DRO in the first place. Therefore, we think the six year restriction should remain in place but only for those clients who have previously successfully completed their DRO. Question 9 Do you consider the competent authority/intermediary model is working well? How could it be improved? Would another model be better? Overall, from our own point of view we consider the current model to be working well. At National Debtline we have a small team of intermediaries who are both highly-experienced money advisers and now work full time as Approved Intermediaries. Clients telephone the helpline and are provided with detailed advice on all of their debt options. If the client wants a DRO and it is a suitable option for them then they are sent a DRO pack to complete. When the pack is returned it is allocated to an Approved Intermediary who will work through the application paperwork with the client using the telephone, post and . At times, due to the high volume of applications we receive and the limited resources we have, there is a backlog of cases waiting to be dealt with. This has been as high as 11 weeks at its worst. However, in the main we are able to contain it to between four and six weeks. As part of this process, the client is continually contacted throughout this waiting period to ensure that the application process is easily manageable. One of the main issues is the amount of checking and scrutinising of paperwork the Approved Intermediary has to undertake. This includes checking all income, bank statements, credit reports and also a degree of client investigation which can involve looking for much more detailed information. However, it is difficult to see a way around this level of scrutiny as it provides reassurance for creditors. They can be confident that applying for a DRO is not an easy option and there is a good level of scrutiny and verification involved. This scrutiny may be even more vital for creditors if the parameters are changed and the doors opened to many more potential DRO clients. If the DRO eligibility parameters are changed, it will inevitably result in more potential applications from clients of debt advice services. This will put more pressure on our resources. Our resources are continually being reviewed to make sure we can deal with demand. However, there is a finite resource available to subsidise our DRO service from within Money Advice Trust s own funding resources. Competent Authorities are struggling with the number of clients they have to deal with due to a persistent lack of resources and sufficient funding. Therefore, we suggest that further avenues of funding should be explored with the Money Advice Service to make sure that Competent Authorities receive the funding they need to increase capacity and provide a proper service. This should be done in parallel with decisions on changing the qualifying Insolvency Service-DROs & the bankruptcy petition limit 13

14 parameters for DROs to ensure that there is sufficient capacity to deal with the increased demand. Question 10 Are debtors who are suitable for DROs aware of their existence? Many members of the public have still not heard of DROs but many have heard of bankruptcy. DROs have not been well publicised. Most people only become aware of a DRO once they find themselves in such a desperate situation that they need to seek help with debt and they contact their local CAB or other debt advice organisations such as ourselves. Then, depending on the agency, they may or may not be advised about a DRO. For example, if a client who is suitable for a DRO contacts ourselves or a CAB or similar debt advice organisation then we are confident that all of their debt options will be discussed. This will include a DRO if it is suitable for their circumstances. This may well be first time that the client has come across a DRO. However, this may not be the case for some commercial companies. Although under FCA rules, the full set of debt options ought to be set out for clients, there is little incentive to do so if the commercial company will not benefit from providing the advice. The recent growth in low-value IVAs contains at least some and possibly rather a large number of people who would have qualified for a DRO but were not aware of this. IVAs are heavily advertised; but DROs are not. Clients who contact an insolvency practitioner or a lead generation company may sometimes not have the DRO option explained to them properly or at all. We have come across cases where a budget is completed with very low and often unrealistic expenditure figures. This leads to the creation of a surplus income to enable the client to become eligible for an IVA. However, because the budget figures are so tight the IVA often fails as the client cannot stick to such an unrealistic and unsustainable budget. DROs are on advice sector websites and included in literature produced by organisations such as National Debtline, Citizens Advice and the other Competent Authorities. However, there are many other debt organisations such as some Insolvency practitioners and commercial debt management companies that do not feature DROs at all or if they do, not very prominently. To address these issues we would suggest that all insolvency practitioners and lead generating websites and advertisements should mention a DRO as a possible debt option at the same point and with the same emphasis that they mention IVAs, bankruptcy and debt management plans. This would need to be an issue addressed by the FCA and by the Insolvency Service as regulator for insolvency practitioners. We would also suggest that there is more advertising of DROs in appropriate places where people seek help. As an example, this could be done through doctors surgeries, hospitals, food banks and so on. Information on DROs should be easier to locate on the Insolvency Service section of the GOV.UK website. See our response to question 11 below. Insolvency Service-DROs & the bankruptcy petition limit 14

15 Question 11 Do debtors know to contact a competent authority to pursue a DRO application? In our experience people who have contacted a reputable debt advice organisation or who are savvy at researching solutions on line would be made aware of how to contact a Competent Authority. This information should also be readily accessible on the Insolvency Service section of the GOV.UK website. We have raised our concerns that this information is difficult to find since the Insolvency Service became part of the GOV.UK website. We have suggested a link from the corporate page to a page on DROs. We don t think it is sufficient for this to be hidden under the topic of declaring bankruptcy as clearly a DRO is not the same as bankruptcy. Equally while it is likely a member of the public might come across the relevant GOV.UK page on bankruptcy through relevant searches, due to the low awareness of DROs, it is unlikely a member of public would actively research it, therefore signposting to it as another debt option on all relevant pages (including the top level bankruptcy overview page where most traffic is likely to land) would help to raise its visibility. We also cannot find any information on the competent authorities for DROs apart from a link to the Money Advice Service debt advice page. 7 However, the Money Advice Service debt advice search cannot tell you whether an organisation is a competent authority or not. So a client may be seeking advice from an organisation that is not able to offer a DRO at all. We would suggest that more can be done to make this public information available. We feel more could be done to publicise the availability of DROs and how to access free debt advice services which can offer a DRO because they have approved intermediaries in place. This should be through public information websites such as GOV.UK and the Money Advice Service in particular, but other sources of public information should ensure that easily accessible links to the relevant information are included. Question 12 Is there any issue with the geographical coverage of the competent authority networks? As we operate a telephone only service we are able to assist clients in any geographical location in England and Wales. We believe this is an issue for clients who require face-to-face or outreach services due to the lack of resources in local advice centres. There are not always approved Intermediaries available to deal with their case. We understand that this is a particular funding issue since debt was removed as a subject matter area from legal aid contracts as many approved intermediaries were appointed under legal aid contracts in local advice agencies. It is likely that many more remote areas have no face-to-face advice coverage at all. This is particularly an issue for clients who are not suitable for telephone advice and need the support of someone who can assist them face-to-face. We would suggest detailed analysis is undertaken by the Insolvency Service with the collaboration of the Money Advice Service on this issue which would help to identify the scale of the problem and enable solutions to be identified. 7 Insolvency Service-DROs & the bankruptcy petition limit 15

16 Question 13 Is there any issue with the speed of DROs applications? If yes how can it be improved? The DRO online application functionality has improved vastly since DROs were introduced in The screens are much easier to navigate and it is a much quicker process. However, there are many more improvements that can be made for the online application to be more user-friendly and efficient. For example, the ease with which an intermediary can move between screens could be greatly improved. If an intermediary wishes to move from the last page of an application to the first, it is necessary to scroll through all the pages on screen. It would also be useful to have tabs at the top of the screen, to allow easy movement between screens. Where there are answers required to button questions, the page has to refresh itself and this takes up unnecessary time and prolongs the process. The implementation of the new DRO portal at the end of 2015 should hopefully resolve a lot of these issues. We have raised our concerns with the Insolvency Service team who are implementing the new and improved DRO portal and are working with the team to ensure the new portal includes new and improved features which should enhance the process. In terms of the speed that the DRO unit processes applications once they are submitted, we find that in practice, applications are usually approved or declined within a maximum of 48 hours. Question 14 Is there any issue with the number of intermediaries? If yes, is this a funding issue? We agree that there is an issue with the number of intermediaries available across the sector. We have outlined some of our concerns in our response to question 9. If the DRO eligibility parameters change then we would need to increase the number of intermediaries at National Debtline. This would be difficult to do without specific funding to enhance the service. With regard to other organisations such as Citizens Advice, there may be a funding-related capacity issue with not having anywhere near enough intermediaries to deal with DROs. We would strongly support more funding for intermediaries as this is required across the sector. Question 15 Do you think that the revocation system is working effectively? If not, what changes should be made? Overall we think the revocation system is working well, especially since the policy changed regarding the treatment of lump sums received during the moratorium, allowing the Official Receiver to use their discretion more. However, we would suggest that the Insolvency Service could be more transparent about decisions they reach when objections are lodged. We sometimes receive detailed questions from the Insolvency Service when an objection is raised on an approved DRO but rarely get informed of the subsequent decisions. It would be beneficial to see the details of the decision taken by the Official Receiver in each case and a full explanation as to why an objection has been accepted and an order revoked in order to better advise future clients on the likelihood of the approval of their applications. Insolvency Service-DROs & the bankruptcy petition limit 16

17 Question 16 Is the current treatment of increases in income and windfalls appropriate? In the main we believe that the current treatment of increases in income and windfalls works well, especially where the client is able to make reasonable repayments to their creditors as a result. However, if the client has an increase in income which brings them over the 50 threshold or a one-off windfall which causes the DRO to be revoked, then in some cases this does seem harsh, especially where the amounts are relatively small and will not have much of an impact on the client s financial circumstances or result in returns to creditors. In many of these cases the client is even worse off as interest will be added back into the outstanding debts after the DRO is revoked and they find that their debts have increased. We agree with the solution suggested in the R3 report that suggests introducing a mechanism in such cases to enable clients to make a contribution to creditors without losing their DRO. Clients who are both open and honest about their change of circumstances could be given the option to be moved into the bankruptcy system and an equivalent of an Income Payment Arrangement (IPA) put in place to give the creditors some contribution. If this were to happen, clients would still be afforded the protection of the DRO or bankruptcy order. Question 17 Do you consider that the DRO restriction system is working well to deter reckless behaviour? What changes should be made, if any? As far as we are aware there have been very few restrictions imposed on clients as compared to the number of DRO cases that have been approved. Cases are not normally investigated until an issue comes to light, perhaps through a creditor objection or some other alert mechanism. Investigations are both time-consuming and costly for the Insolvency Service and do not appear to result in many restrictions being imposed. We are of the opinion that improvements could be made to try to deter reckless behaviour. It is our understanding that if an approved intermediary flags up an issue this is normally noted and further questions are asked by the Insolvency Service. However, as far as we are aware no further action is taken at this stage. It is only if a creditor subsequently objects that the case may be investigated and a restriction imposed on the client. We feel that if an approved intermediary flags up a potential issue that is should be investigated regardless of whether the creditor objects or not. We also agree with a point made in the R3 report about the possibility of restrictions being imposed on individuals even if their DRO has been revoked. This leaves clients subject to restrictions for up to 15 years without being afforded the benefit of debt relief. This seems unfair and we are of the opinion that restrictions should only be imposed if the client is subject to the DRO. There are many instances where we have had clients who have applied for a DRO but have either been declined or have not gone ahead with their application because of issues such as preference payments. We feel strongly that this should not prevent the DRO from going ahead. We suggest that a Debt Relief Restrictions Order (DRRO) should be imposed Insolvency Service-DROs & the bankruptcy petition limit 17

18 instead if appropriate, as is the case in bankruptcy. It seems unfair that some clients do not qualify for a DRO as a result of taking action (often entirely innocently) such as repaying a family member or friend before repaying creditors. We would expect most people would be likely to do the same in a similar situation. The client still qualifies for a DRO in every other respect and has no assets or little surplus income but is precluded from applying for this form of debt relief. We strongly recommend that this is changed so that DRROs mirror the way restrictions are imposed in bankruptcy so as not to prevent a client from being bankrupt. Question 18 Do you consider that the DRO regime has encouraged debtors to seek debt relief at an earlier stage? If yes, please explain how this has been a benefit including any case study evidence? We have set out some of the reasons we believe that people are not aware of DROs in our response to question 10. We are great supporters of the value of debt advice being offered at the earliest stage possible when people fall into debt. We would suggest that the difficulty debt advice agencies, creditors and Government have in persuading people to seek debt advice at an early stage has been well documented. The Money Advice Service research Indebted Lives 8 has shown that there are up to 9.1million people in the UK who need to seek debt advice but do not do so. It is a great challenge to persuade people to seek debt advice at an earlier stage before their financial position has deteriorated. For information on early intervention strategies, please see our research with the Personal Finance Research Centre. 9 In this context, it is fair to say that people seeking debt advice are not aware that a DRO exists as a debt remedy specifically as they will not be aware that they qualify. They are most likely to be seeking advice generally. We would not see this as a specific problem for DROs as a debt option. It is clearly a wider issue. People may contact a debt advice agency or research the internet at the same point - usually when they realise they need to take action to resolve their situation. Once the relevant clients are made aware that a DRO is an option and it is right for them then they will apply. This will have a beneficial effect for those clients who qualify. They may have been concerned that they would have to go bankrupt as this is one of the few debt options most people will be aware of. The availability of a DRO means that some clients who are unable to pay the fees for bankruptcy are able to apply for a DRO and have the benefit of debt relief which would not previously have been available before DROs were introduced. Question 19 What is an appropriate length of time for discharge? We would suggest that one year is the appropriate length of time for discharge and it also mirrors the discharge time for bankruptcy Understanding Financial Difficulty: Exploring the opportunities for early intervention Insolvency Service-DROs & the bankruptcy petition limit 18

19 Question 20 Do you think the length of discharge and the length of DRO restrictions should be the same or different? Please provide reasoning for your response and indicate what an appropriate time for both is? The length of time before discharge and the length of DRO restrictions should be different. The length of discharge at one year is appropriate. However, restrictions can be imposed when the client has been deemed culpable and these should act as a deterrent. We agree that it is the correct approach for restrictions to be imposed for up to 15 years on a discretionary basis. This decision is made by the Official Receiver who will take into account the full facts of the case and is best placed to make such a decision. However, as detailed above we do feel that DRROs should be imposed more frequently as a mechanism to avoid the necessity of revoking a DRO instead. Such an arrangement would also mirror bankruptcy practice. Currently, DROs can be revoked where there has not necessarily been a serious infringement in conduct by the client but the criteria for revocation are still met. For example, revoking or declining a DRO application where the client took out further credit without the reasonable prospect of repayment seems unnecessarily harsh. A DRRO should suffice in these instances.. Question 21 - Do you think DROs impose any barriers on employment or self-employment? If yes, how could this be mitigated? There is clearly a significant growth in self-employment in recent years with analysis published by the IPPR showing that the numbers of self-employed has risen by 8% between 2013 and This rise may result in a number of new small businesses getting into difficulties with debt. 11 For the self-employed there is an issue with regards the stock belonging to the small business being considered an asset. This means that the self-employed client is very unlikely to be eligible for a DRO as their stock is likely to be worth more than 300. This can be very restrictive for some business owners and cause problems in accessing debt relief. Perhaps the asset threshold for stock (if this is essential to the survival of the business) could be looked at again with a view to increasing the level. For clients seeking additional employment, we would accept that it is possible that some people may put off finding better-paid employment where they have the potential to be better off because of concerns about their DRO being terminated. However, in most cases, clients who are seeking employment will still qualify for a DRO due to the low levels of salary they will receive. In our experience most of our clients with DROs would be in the position of looking for low paid or unskilled work. It is also important to note that in most cases an increase in wages will result in a commensurate loss of top-up benefit income such as housing benefit and tax credits Insolvency Service-DROs & the bankruptcy petition limit 19

20 If successful, once the resulting reductions to housing benefit, council tax support and other benefits have been factored in, they would not be so substantially better off to invalidate their DRO. They would be likely to still fit into the 50 disposable income category. This problem could be overcome if the client could be switched to a form of bankruptcy and be made subject to an Income Payment Arrangement (IPA) or similar as suggested in our answer to question 16. Question 22 - Lenders/Credit rating agencies only: What credit policies do you have for someone who has gone through the DRO process? We have no comments to make in response to this question as we are not a lender or a credit reference agency. Question 23 - What impact have DROs had on the wellbeing of debtors please provide evidence? We have recently undertaken a telephone survey of clients who have successfully completed their DRO. We managed to get feedback on their wellbeing following the DRO from 30 of our clients. The sample consisted of National Debtline clients who had completed their moratorium period within the last 6 months. Every single one of them said that a DRO had a huge impact on their wellbeing and had improved their lives for the better, and had relieved their stress levels and so on. We would suggest that the response we received demonstrates the positive impact of a DRO on the wellbeing of clients. We appreciate that the survey is small, but would stress that we did not have a single negative response. Here are some of the quotes from our interviews with clients. DRO has changed clients life, has helped immensely not just mentally but also physically as client was struggling to get pregnant due to the stress. Client states since DRO approved now pregnant! Client states that the DRO has drastically reduced stress levels and has helped her to manage her ongoing bills rather than worrying about paying them as well as paying debts. Things are much better emotionally. Pre DRO it was causing arguments and stress on her relationship. Things have been much better in her relationship since the DRO was accepted. Client feels that she doesn t want or need to take out further credit in the future. Client was at work so could not say much. However, client stated that the DRO saved her life. Client states that he has taken a different outlook on life since the DRO. Client states that he was suicidal before the DRO (client is fine now). He can t thank us enough for our help. He wouldn t have been able to deal with the debts if it wasn t for the DRO. He now feels he can look forwards to his life. Took a lot off the client s shoulders, client has four children and although things are tight feels he can spread his money better paying for important things like food. Insolvency Service-DROs & the bankruptcy petition limit 20