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calendar18 February 2021

Author: Laura Kirkham

Too deep in debt to break free? Why we need to simplify the solution

Too deep in debt to break free? Why we need to simplify the solution

My name is Laura and I work as a Senior Debt Advisor in the Insolvency Team at Christians Against Poverty. Our team helps those clients who simply can’t afford to repay their debts within a reasonable timeframe.

There are two main types of insolvency, if you live in England, Wales or Northern Ireland. Most people have heard of bankruptcy, but a Debt Relief Order, or DRO, is a form of insolvency for people with low incomes and few assets. This is for people whose budget is simply too tight to pay back their debts, and they don’t own much of value that they could sell towards repayments either.

Most of the clients we help in the Insolvency team fall into this category: on average they’d have spent 58 years paying back all their debts, so a DRO is a chance to get their lives and their finances back on track. However, we find that many low income clients are excluded from a DRO because they fall short of one or two criteria. (Join our campaign now to make DROs accessible to those who need them!)

During my time at CAP, I’ve experienced many challenging conversations with clients where I have to tell them that a change in circumstances means they are no longer eligible for a DRO. In these conversations I have to tell them that the fees for bankruptcy are seven times more than a DRO, costing £680 instead of £90. The discussion is never an easy one to have.

Simplify the solution to problem debt

This month, CAP has launched a new report called Simplify the solution, which builds the case for why the eligibility criteria for a DRO must change. At the same time, the government body overseeing insolvencies, the Insolvency Service, launched a consultation for changes to the monetary eligibility criteria for a DRO. As momentum builds, this is a perfect time to see changes and to help more people access an affordable debt solution.

The problem with the DRO debt limit

Tony* was all set for a DRO, but a final check revealed that one debt balance was higher than we had originally listed. This brought his total debt balance to over £20,000. A DRO has a debt limit of £20,000, and so he was no longer eligible for it. Tony is not alone. More than half of CAP clients excluded from a DRO have less than £30,000 of debt, which is the new limit proposed by the Insolvency Service. But our research shows that increasing the limit to £50,000 would cover a huge 92% of CAP clients who are currently excluded based on debt balance alone. They are living on extremely restricted budgets, have no real assets that they could sell to pay off their debts, and have no realistic chance of saving the £680 they would need to pay for bankruptcy.

The vehicle limit

It’s no secret that good quality things tend to last longer than those of poor quality. Cheap shoes will often be walked into the ground within a few months, whereas a pair of expensive shoes may last for years. The same applies to vehicles and this is the perpetual cycle of poverty that a lot of our clients find themselves in. Cheap old cars repeatedly break down, which can mean you’d spend more on repairs each year than if you’d been able to afford a more reliable car in the first place. And that’s money that people on the tightest budgets just don’t have spare.

Our client Susie* found herself caught in this trap, so her parents gave her a new car which allowed her to drive her daughter to hospital for frequent appointments. This was great news for Susie. However, since the new car was worth £1,500, it meant she was no longer eligible for a DRO. Even if she applied for bankruptcy, it risked her car being taken and sold by the Official Receiver to pay back some of her creditors. By keeping the vehicle limit at £1,000, clients who need cars are having to decide whether to sell reliable vehicles and risk paying more in repairs down the line.

Debt Relief Orders bring real hope to people who find that they can access all the freedoms of having their debt cleared without all the unwanted stigma or costs of a bankruptcy. The existing eligibility criteria for DROs is no longer suitable. The Insolvency Service is proposing to make great steps this year to expand the DRO criteria allowing more people to access this solution to their debts, but we are asking them to revisit their proposed changes to offer more of the country’s most vulnerable people a way out of the darkness of debt.

You can help make a fairer system for people trapped in poverty! Add your voice to our campaign today, and tell your local MP that you want DROs to be accessible for those who need them. Use our ready-made template to email your MP.

*Names have been changed.

Photograph taken by Kathryn Anne Photography

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