Government announces changes to debt relief orders
Edward Davey, Minister for Employment Relations, Consumer and Postal Affairs has announced 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 was not going to be paid for a number of 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 6 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.
What is a debt relief order?
A DRO is designed to provide a fresh start for the most vulnerable people trapped in debt and it provides a form of insolvency for those with limited assets. To be eligible debtors 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.
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.
This is great news, but DROs are still far from perfect. 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 in month 11 of the DRO, then this extra income may well mean that he or 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...
The circumstances in which a property is worth less than the outstanding mortgage debt secured on it. Although it traps householders in their properties, the Council of Mortgage Lenders (CML) says there is no causal link between negative equity and mortgage repayment problems. At the depth of the last housing market recession in 1993, the CML estimated 1.5 million UK households had negative equity but most homeowners sat tight, continued to pay their mortgages and eventually recovered their equity position.
Generally speaking, insolvency is to businesses what bankruptcy is to individuals. A company is insolvent if the value of its assets is less than the amount of its liabilities, or it is unable to pay its liabilities (loan payments) as they fall due. It’s an offence for an insolvent company to keep trading, so the main options available to an insolvent company are: voluntary liquidation, compulsory liquidation, administration or a company voluntary arrangement.
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.