Government’s new debt solution isn’t working
The government has at long last decided to review the workings of debt relief orders, the new, lower-cost option for people to avoid bankruptcy.
Introduced in April 2009, a debt relief order is a less stringent form of bankruptcy but still with the same restrictions as a normal bankrupt. They are designed for people with a certain amount of debt, little disposable income and few assets and are intended to place the least complicated debt discharge cases on a fast track through the court system with no personal appearance at court required.
On paper, debt relief orders sound great and are just what we need to help consumers battle with their debts.
But are they really any good? Rather than detail the qualifying criteria it might be simpler if I identify those of us that won’t qualify for a debt relief order - surprise surprise, most of us.
First off, you will not qualify if you have unsecured borrowing in excess of £15,000 (which includes credit and store cards, personal loans and overdrafts) or if you have assets above £300.
You can work out the value of your assets by establishing the purchase cost and divide it by between 5% and 10%. For example, a fish tank you bought for £300 would be valued around £15 to £30.
Now do this for all your possessions - I bet you get to past the £300 mark before you have even done the contents of one room.
And if your assets are £301 then forget the debt relief order.
Even if you qualify up to this point, if you own a vehicle with a market value of £1,000 or more, then you're excluded.
Next up we have the disposable income - this is the sum of money you have left after meeting your normal reasonable expenditure costs. If this is above £50 then, again, the debt relief order is out.
Now we move onto your home. If you own a home then you cannot take out a debt relief order – even if you are in negative equity (that is, the value of your mortgage debt is greater that the value of the property).
Now, on to pensions. If you have a pension pot worth in excess of £300, then you cannot propose a debt relief order. In contrast, in bankruptcy you can keep your pension and still make payments into it.
The government’s review will focus on the criteria for the value of pension pots.
Business minister Ian Lucas says: “Debt relief orders help people who would otherwise be trapped in poverty to get back on their feet. Following representations from independent money advisers, I’m proposing a common sense change to ensure that vulnerable people with a very small pension pot are treated fairly. The government will consult on this change shortly.”
Note the words “common sense change”. If there were any common sense being applied, the government would deal with the whole issue by:
* Increasing the assets amount to around £3,000
* Including homeowners that are in negative equity
* At least doubling the car amount to £2,000
* Increasing the disposable income level to £100
However, addressing these areas would probably push up the insolvency figures - 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.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.