UK debt relief limits under review as economic impact of Covid-19 bites

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The proposals would see the total amount of debt allowed to enter a DRO increased from £ 20,000 to £ 30,000. The value of assets held by individuals accessing a scrutineer would drop from £ 1,000 to £ 2,000, and the level of excess income from £ 50 to £ 100 per month.

DROs were introduced in 2009 as low cost and accessible debt solutions to support vulnerable people. They protect the debtors from the action of the creditors and after 12 months all the debts of the order are written off.

The consultation follows an announcement last year that the government would introduce a respite program in 2021, to give people in debt a 60-day break from creditors enforcement actions while they access professional advice in terms of debt.

Financial services expert Jonathan Cavill of Pinsent Masons, the law firm behind Out-Law, said a move to support vulnerable people was accompanied by work by the Financial Conduct Authority (FCA) and a survey conducted by Pinsent Masons on the interactions and considerations between mental health and financial health. The survey found that over-indebtedness can also be linked to mental health problems or addictions, and people with debt problems were twice as likely to develop major depression as those without. financial difficulties.

“Studies have shown that over-indebtedness can be linked to mental health issues or addictions. People with debt problems are twice as likely to develop major depression as those without financial difficulties, and this can also be a contributing factor to anxiety and depression, ”Cavill said.

“The FCA has explained in recent years how the industry should reflect on the challenges facing vulnerable customers, as well as last year, in setting various directions for businesses to support customers who may be grappling with the consequences of the pandemic. The government’s proposals support the work the FCA and financial services companies are doing in this area and demonstrate that continuous improvements can be made to ensure fair treatment for those who need it most, ”said Cavill.

The government said the uncertain economic outlook caused by the Covid-19 pandemic, and the upcoming introduction of the breathing space program, meant it was appropriate to consider whether the current limits on DROs need to be changed.

He said the number of people getting a DRO in 2020 was lower than the same period in 2019 – largely due to a combination of greater tolerance shown by the credit industry and financial support. government linked to the pandemic.

However, the Money and Pensions Department predicts a 60% increase in the number of people needing debt counseling by the end of 2021, with around 3 million more asking for help. About 10% of the increase in demand is expected to come from people for whom bankruptcy is currently the only option for debt relief.

According to the government, increasing the asset, income and debt thresholds would result in the eligibility of approximately 15,500 additional people for a DRO, a 58% increase over the number of people who obtained it. one in 2019/20.

The consultation suggested that there would be a cost to creditors in a limited number of cases where an individual would be able to access debt relief, compared to an alternative that would have provided a distribution.

There would also be benefits to creditors from reduced administration and collection costs. The government said that in cases of low assets and low debt, the actual debt collected would likely be very low and generally exceed the cost of collection, and debt forgiveness in these cases could result in a net benefit to creditors. compared to the status quo.

Financial services expert Daniela Ivanova of Pinsent Masons said: “The respite program and proposed changes to tellers to make them accessible to more people with relatively low unmanageable debt levels are welcome steps. which will be linked to FCA’s coronavirus interventions in the financial sector. service industry to help customers in these difficult times.

“In addition to treating vulnerable customers fairly and the considerations that should be given to FCA’s vulnerable customer initiative, companies will need to adapt their processes to government actions and proposed changes to the DROs if they are adopted,” he said. said Ivanova.

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