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Christians Against Poverty urges debt-relief reform to meet pandemic needs

09 February 2021

Dylan Gillis/UnSplash

THOUSANDS of people across England and Wales are being forced into bankruptcy because they do not meet the threshold for a Debt Relief Order (DRO), which is significantly cheaper, Christians Against Poverty (CAP) has estimated.

The national debt charity works through its network of more than 580 churches in the UK to provide debt advice to 12,500 clients.

DRO is a form of insolvency which offers a simple, accessible, and inexpensive path to debt relief for people in otherwise insurmountable financial distress. It is much more affordable — and “more timely, certain, and less stigmatised”, CAP says — than bankruptcy: it costs £90 apply for a DRO, while a bankruptcy application is £680.

The Individual Voluntary Arrangement (IVA), for people who still have a stable income or lump sum, costs £5000 on average. Very few CAP clients who are advised on insolvency are eligible for this option (one per cent of 5211 new clients in 2019).

Nine million people in the UK are over-indebted, i.e. unable to meet repayments or falling behind with other bills as a result of paying existing debts. In England and Wales today, more than 100,000 people become insolvent in a given year, either through IVA, bankruptcy, or DRO. The top three causes of debt, CAP says, are low income (25 per cent), mental ill-health (21 per cent), and relationship breakdown (14 per cent).

The current threshold of debt to apply for a DRO is £20,000, but this is to be raised to £30,000 under proposals from the Department for Business, Energy, and Industrial Strategy (BEIS) and the Insolvency Service. This would allow 60 per cent of people who are currently excluded to apply. The value of permitted assets is also to be raised from £1000 to £2000, and the limit on surplus income to be raised from £50 to £100 per month.

CAP, however, is urging the Government to raise the DRO limit further to £50,000 to help thousands more people (92 per cent of those currently excluded) with more drastic debt levels to avoid the expense of bankruptcy. Its latest report, Simplify the Solution, published on Tuesday, states that, in 2019, almost two-thirds of its 5211 new clients (59 per cent) required an insolvency option to become debt-free; otherwise, it would take 58 years on average to repay their debts.

In the previous two years up to July 2020, CAP helped 3243 clients to make a successful insolvency application, it says. Half its 935 clients who entered bankruptcy in this time (53 per cent) are the target demographic for a DRO — having less than £50 of surplus income and less than £1000 of assets — but many of these (37 per cent) failed to qualify because their debt exceeded the £20,000 threshold.

A CAP insolvency adviser explained: “[The DRO has] got quite strict entry criteria and [clients] can just be flat out rejected if they don’t fit those. . . Imagine you’ve got £20,001 of debt and you automatically have to shell out another £500 for your insolvency.”

The charity has also called for the vehicle-value threshold (which is not counted as an asset) to be raised from £1000 to £2000 to reflect the current costs of a low-priced reliable vehicle. The report says: “A dilemma is now increasingly imposed on clients who must either sell a modestly valued car to purchase an older vehicle and potentially face significantly higher maintenance costs, or pay a higher fee to go bankrupt instead.”

Pre-existing debts should also be able to be added in the DRO after the application has been made (if this would not breach the debt limit), CAP says. “To allow for a debt to be retrospectively scheduled would make sure the debt relief provided through a DRO is effective, and significantly lighten the burden on the debt advice sector when supporting people with applications.”

All of these criteria should be reviewed every three years to future-proof access to the solution, the report says.

The Social Policy Manager for CAP, Rachel Gregory, said: “So many people will need to access a DRO because of pandemic debts [that] it’s vital we simplify the solution so they can do this and start to rebuild their lives. It would also be beneficial for creditors. They wouldn’t have to waste resources trying to collect debts that cannot be repaid. Many would also save money by avoiding unnecessary investigations undertaken in the bankruptcy process.” Read the full report here

Business at risk of collapse. Almost 600,000 employers in the UK are at risk of business collapse this spring without an urgent extension of government support, new analysis from the IPPR think tank suggests.

National support schemes, such as loan guarantees, the business rates holiday, and furlough support, are due to end in late March and April. A short paper published on Wednesday by the IPPR Centre for Economic Justice warns that companies will be expected to repay loans and back-date VAT bills from the pandemic, meaning that cash reserves will be critically low.

Small businesses (which employ fewer than 50 staff) will be hit hardest with 40 per cent now having less than three months’ worth of cash reserves. Half of all firms involved in hospitality, food, the arts, entertainment, and recreation sectors are in a similarly precarious position.

The IPPR economists are urging the Government to extent support schemes until the economy is fully open again; extend grant support beyond firms obliged by law to close; and offer cash injections to struggling but viable businesses in return for shares in those firms.

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