Campaign Win – removal of Debt Relief Order fees in the Budget 

Amidst all the news and commentary around the Budget you may have missed an important win for household debt campaigners.  

The changes center around Debt Relief Orders (DROs), a way that people with unmanageable debt can get it written off if they also have low incomes and few assets.  

In his speech, the Chancellor revealed that the £90 DRO administration fee will be removed in April. That’s the fee that people are charged just to be able to take part in the scheme. Treasury calculations show this will benefit people in debt by £5million a year. Of course, people shouldn’t be charged to write off debt in the first place! But it’s still a good thing that this fee has been removed.  

Just as significantly, it was announced that the barriers to accessing DROs will be reduced. People on low incomes with debts of up to £50,000 and with a vehicle value of up to £4,000 will now be eligible. This is important as people with heavier debt burdens will be able to get them written off, and they won’t have to sell their cars to access the scheme.  

Much more needs to be done to write off personal debt 

Reform of the UK’s personal insolvency landscape is important because it can help more people get their unpayable debts written off and facilitate a fresh start.  

The Budget announcement follows a UK government review of the personal insolvency framework, which covers different ways that people can get debts written off In our submission to the review, we said that “seeking fees from people in debt during insolvency stands in stark contradiction to the ‘fresh start’ objective”, adding “Procedures should therefore be funded through general taxation, as they should be seen as part of the necessary architecture of a modern economy and an extension of the social security system.” This announcement takes us a step closer to this outcome.  

We are hopeful that this announcement is followed up by more ambitious reform of the personal insolvency framework. We calculate that only around 7% of people who receive debt advice are currently able to begin the process of insolvency because of the overly restrictive barriers to accessing debt relief.  

This means that most people that are heavily in debt are pushed down routes that do not contain a right to debt relief. People who do not qualify for insolvency are often expected to repay their debts in full through lengthy Debt Management Plans, seek ‘debt consolidation loans’ or negotiate ‘full and final settlement’ with their creditors, an option which is only available to people with some access to funds. 

Furthermore, not all insolvency options are useful to people on low incomes. Individual Voluntary Agreements (IVAs) can be used to exploit people’s desperation to stop the barrage of emails, calls and letters from creditors. Warped incentives and large fees mean IVAs are heavily marketed. Nearly a third of IVAs fail, meaning that some people in debt are in a worse financial position afterwards, having paid thousands of pounds in upfront fees. 

Other shortcomings in the insolvency framework remain: 

  • Retaining a home throughout insolvency gives people a platform to rebuild their lives, but right now owner occupiers who are on low incomes do not have a suitable option that allows them to retain their homes.  
  • Restrictions on repeated use of insolvency should also be dropped as people in debt need insolvency options to remain available to them based on need, without arbitrary cut off dates.  
  • Greater flexibility around the DRO application process is also required. It is not uncommon for people in a debt crisis to be unaware of some of the debts they hold, therefore the process needs greater flexibility in registering debts that they may have been unaware of at the time of application.  

Whoever is elected needs to take real action on debt 

Ultimately, we would also like to see the government working towards a single set of tiered statutory insolvency options based on differing levels of assets and income. This would facilitate easier transfer between statutory solutions in response to changing financial circumstances.  

This is important because people in debt going through an insolvency process are disincentivised from increasing their incomes during the procedure. Sometimes increasing your income can mean paying back more to creditors during the insolvency period or even invalidating a DRO.    

The announcement is an important first step in tackling the household debt crisis, but we need to see much more ambition from political parties, especially during a general election year. Add your name in support of our Together Against Debt Manifesto, where we outline a more expansive vision for change.  

Share This