What could this mean for consumers struggling with debt?

When the Chancellor delivered his budget last week, there were relatively few surprises given that so many of the headline announcements had already been briefed out to the media beforehand. 

This used to be serious enough to be a resignation issue, but times change and now it is seen as an essential tool to communicate any big or possibly controversial measures to see how they are received before they are officially announced. 

So when Jeremy Hunt sat down, interested watchers would have a small list of new items to pour over but there were unannounced measures that should be of interest.

The change involves Debt Relief Orders (DROs)

A Debt Relief Order is an insolvency process for individuals who have low or no assets and little or no spare income to be able to make any repayments on their outstanding debts. 

First introduced in 2009, they were intended to provide a simpler and cheaper path through insolvency for individuals.

The proposed changes for England and Wales include:

  • Removing the £90 administration fee from 6th April 2024
  • Raising the maximum debt value threshold from £30,000 to £50,000 
  • Increasing the maximum value of a motor vehicle that the individual can retain from £2,000 to £4,000

Many DRO applicants who need a fresh start from unmanageable personal debt simply can’t afford a one-off £90 DRO fee and therefore find themselves missing even more payments on their debts if they were to try and save for one. 

Debt advisers tell us that they frequently end up making time-consuming grant applications to try and raise the fees for their clients so this will help thousands of potential applicants every year from April. 

When DROs were introduced the total debt that they could be eligible to have was £15,000.  This was increased to £20,000 in 2015 and £30,000 in 2021. 

Applicants with debt over this amount had to go bankrupt or enter IVAs  instead. As you know, bankruptcy and IVAs have a much higher fee for the individual to raise (currently £680 for bankruptcy) and generally a 60 month co tribution commitment for IVAs. 

There was no realistic reason why somebody with £45,000 of unmanageable personal debt should have to go down the route of bankruptcy when they have few or no assets to realise and no spare income to make additional monthly payments either. 

Having a motor vehicle is essential for many DRo applicants whether they are care or shift workers or just having to juggle work and childcare or elderly care commitments and cannot match their needs with deteriorating public transport options. 

A car is not a luxury and frankly one worth £2,000 or less is more likely to be unreliable and expensive to run in terms of repairs, insurance, tax and general upkeep. In cities such as London with ULEZ and other emissions rules, a second hand car valued under £2,000 is unlikely to be eligible adding more expense if they have to enter those zones. 

Doubling the value limit will mean that potential applicants are more likely to commit to a DRO.

YearDebt Relief Orders Issued

Figures from The Insolvency Service

Last year saw the highest number of DROs granted in over five years, surpassing the pre-covid total by over 4,000 and increasing by 30% on last year’s total. 

Chris Horner, Insolvency Director with BusinessRescueExpert, explains why these changes are going to have direct effects almost immediately. 

He said: “By removing the fee requirements for a DRO, many more borderline personal insolvencies are going to apply for a DRO as there is now no risk or cost in pursuing one.

“This will most likely mean that there will be a large reduction in the total amount of Individual Voluntary Arrangements (IVAs) and personal bankruptcies as a result. 

“This is a really positive development for individuals with debt problems and it will be interesting to see how the changes unfold over the rest of 2024 and beyond for accountants and other financial professionals who deal with personal debt cases.”

We built our new Accountants Hub specifically for busy accountants to get access to all the details they need about specific insolvency procedures if their clients ask so they have the answers immediately. 

But we also like to bring them up to date with the latest news that could impact them – like the DRO changes – that otherwise go under the radar. 

We’re always happy to work with any accountant or firm that has clients in or about to enter financial difficulty to talk through likely solutions and offer their clients a free consultation to discuss these issues in more detail with them.

So no matter what happens in the rest of 2024, you’re not alone when it comes to looking out for your clients.