From the end of this month, the eligibility criteria for debt relief orders is due to be updated, as a result of the financial impact of Covid-19 on the economy and the increased need for people in financial difficulties to have access to a more appropriate debt solution.
When a person is in serious financial difficulties, it is important that they are able to resolve these difficulties and ultimately start afresh, whilst the creditor also receives a return from the assets and income of the person.
Currently, there are various ways in which a person, who is having financial difficulties, can access support, including informal arrangements with creditors, solutions within the statutory framework, bankruptcy and debt relief orders.
What are debt relief orders?
Debt relief orders were first introduced to the UK back in April 2009, following a 2004 Government consultation which found that those with long-term debt problems, who had no assets or disposable income to offer their creditors, had severely limited options available to them.
A debt relief order offered a person, with a relatively low amount of unmanageable debt, an affordable (in comparison to bankruptcy) and easy access option to debt relief and provided them with a chance of a fresh start. An order could be applied for if a person:
- Had debts totalling £20,000 or less;
- The person didn’t own their own home;
- They didn’t have any assets of value (e.g. assets of less than £1,000); and
- They did not have much disposable income (no more than £50 surplus income each month, after paying tax, national insurance and normal household expenses).
Additionally, the individual must have lived or worked in England or Wales during the previous three years and not had a debt relief order in the last six years.
Once the debt relief order had been granted, the person didn’t have to make payments towards the majority of debt types and creditors could not force the individual to pay off the debts. The order typically lasted for 12 months, unless the individual’s financial situation improved, when the debts included within the order were written off (‘discharged’) and the person was no longer responsible for paying them.
Eligibility criteria changes to debt relief orders from June 2021
At the beginning of 2021, the Government held a consultation that sought views that would increase the existing monetary limits of debt relief orders and would widen the eligibility criteria, thus supporting more vulnerable individuals who are facing financial difficulties.
Following consideration of the responses received during the consultation period, the eligibility rules for a debt relief order in England and Wales will change from 29th June 2021, and the following persons will be able to apply:
- Those with debts totalling less than £30,000 (previously £20,000)
- Have less than £75 a month disposable income (previously £50)
- Have assets which are worth less than £2,000 (previously £1,000)
The Insolvency Service anticipates that these changes will have a substantial increase in the number of individuals applying for debt relief orders (around 15,500 more people could be eligible) over the next 12 months, primarily as a result of the impact of Covid-19.
These changes will operate alongside the new breathing space scheme, which was introduced last month, which provides those in debt with a 60-day pause on creditor enforcement action.
Applying for a debt relief order
When submitting an application for a debt relief order there is a £90 fee to pay. The individual will have to appoint an authorised debt adviser to support them, who will complete all the required paperwork and submit the application to the official receiver.
Within the paperwork submitted to the official receiver, the person will be required to state if in the last two years they have made payments to some creditors but not others and if they have given away or sold, for less than their actual value, any assets.
Should the debt relief order be granted, the individual’s credit rating will be impacted, along with their ability to get credit in the future. The order will be recorded on their credit reference files and will remain there for up to six years from the date the order was granted.
How can Nelsons help?
At Nelsons, our team advises individuals, businesses and insolvency practitioners on all matters relating to insolvency proceedings and have the experience to know how to handle each type of situation.