Having finally drafted my presentation for the SWSCA course later this week, I can turn to reviewing the Insolvency Service’s consultation on DROs and the creditor’s bankruptcy petition threshold. There’s still time for you to respond: the deadline is 9 October 2014.

I have to confess that my practical experience is corporate insolvency-heavy, so personally I don’t feel in a great position to comment, but, of course, that won’t stop me!

Strictly-speaking, it is not a consultation, but a call for evidence. Thus, whilst there are hints of the direction in which the Government/InsS might take the issues forward, it’s all (supposed to be) pretty open at the moment.  This also means that the emphasis is on providing data, rather than opinion – another reason why I do not feel well-placed to comment.

The call for evidence can be found at: http://goo.gl/UhT52U.

DROs: Key Questions

Fundamentally, the Service is asking: are the criteria (and the publicity/delivery of DROs) blocking out people who should be able to benefit from a DRO?  Much of the Service’s arguments seem to focus on how many people would move from bankruptcy to DRO if thresholds were moved.  I guess this helps to explore the potential consequences of any changes on suppliers who may react by raising the hurdles for people at the margins from accessing their supplies.  However, what I’m interested in is: at what stage does a bankruptcy become beneficial to creditors?  Surely, this is a key factor in deciding the DRO/bankruptcy threshold, isn’t it?  I don’t think the Service’s consultation document explores this sufficiently.

Debts and Assets

As we know, the thresholds for accessing a DRO are:

• Total debts less than £15,000;
• Total assets less than £300 (excluding certain items); and
• Surplus income less than £50 per month.

Are these at the “right” levels?

The consultation illustrates these thresholds adjusted for inflation:

• The threshold for total debts would move to between £16,200 to £18,900;
• Total assets threshold: £325 to £380; and
• Surplus income threshold: £54 to £63 per month.

Hmm… assuming that the 2009 levels were valid, that appears to suggest that change should be minimal.  The world seems to have changed more than this, doesn’t it?  Or is it our attitudes to debt that have changed?

The consultation also looks to the recently statute-enshrined Scottish Minimal Assets Process (“MAP”) levels:

• Debts between £1,500 and £17,000 (and I recall that many fought to persuade the Minister to increase this from £10,000);
• Assets less than £2,000 (again, I think this was proposed originally at £1,000); and
• Zero disposable income (or income entirely from benefits).

The Service then examines the levels of debts and assets of the 2013/14 bankruptcies, which suggest that, if the two thresholds were adjusted in line with inflation, up to 5% of those who became bankrupt would have qualified for DROs (assuming they met the other DRO criteria). They haven’t done the same comparison to the MAP thresholds, but have illustrated that, if the asset threshold were £2,000 and the debt threshold £30,000 (interesting number to pick!), 23% of last year’s bankrupts could have had a DRO (again, assuming they met the other criteria).  That’s all very interesting, but what is the logic behind the thresholds?

Personally, I cannot see the rationale for imposing a low debt threshold. The Service states that the threshold “was designed to limit the scheme to those with low levels of unsecured debt rather than allowing debtors to discharge ‘excessive’ sums”.  What is an “excessive” sum?  I’m in no position to answer, but, from my corporate insolvency perspective, I don’t see much of the “debt-dumping” that seems to inflame the Daily Mail reader.  I suspect that the personal insolvency world is similar: individuals are in a sorry state when they have accumulated more debts than they can afford; they’re not trying to scam their creditors, simply escape from the hole.  Does it really help to make this endeavour difficult for them?

Ah, but wouldn’t an increase in the debt threshold dissuade lenders etc.? I’m guessing that some debtors suffer a substantial change in circumstances, leaving them unable to support high levels of debt, but I guess there are other debtors who manage to build up fairly high levels of debt whilst having little assets/income to back it up.  Whichever way it is, don’t suppliers at the moment accept the risks that they might not see any recovery from a proportion of those to whom they extend credit?  If these individuals simply move from a nil-return-to-creditors bankruptcy to a nil-return-to-creditors DRO, where’s the harm?  It is far more expensive for the Insolvency Service (i.e. the public purse) to administer a bankruptcy than a DRO and, if the debtor doesn’t have the assets/income to cover those costs, that’s a loss to everyone.  So who is winning from this whole process?

I hear much support for R3’s call to raise the debt threshold to £30,000 and I can see no real argument against that.

As to the level of assets, I also see no reason why it should not be £2,000 (Debt Camel – http://debtcamel.co.uk/dro-consultation/ – makes the sensible observation that computers and the like are generally accepted to be necessities in this day, especially for job-seekers).  However, I’d like to ask the question: how high do the assets and surplus income need to be in order to generate a material return to creditors?  I’ve not done the sums, but there must be a relatively simple answer, mustn’t there?

Surplus Income

The Service’s analysis of surplus income levels is a bit cloudier. Firstly, I’m surprised to read that the Service has no income data for bankrupts who are not subject to an IPO/IPA – why not?  Surely they need to have known what the debtor’s income was in order to decide not to pursue an IPO/IPA, don’t they?  Secondly, later the Service states that “under bankruptcy, an Income Payments Order will be put in place taking the whole surplus income if a bankrupt has a surplus income of more than £20 per month, subject to an allowance for emergencies and contingencies of £10 a month for each family member.”  So presumably, all bankrupts for which they have no data fall below this threshold, don’t they?  The consultation discloses 22,044 “blanks”, i.e. no data cases, which is 93% of the total bankruptcies, but the Service estimates that only 25% of all bankrupts had incomes below the DRO level.  But shouldn’t all those “blanks” be below the DRO threshold?  If not, then why isn’t the OR pursuing IPOs/IPAs from them?

The Service’s argument against increasing the surplus income threshold is pretty-much that, apart from the emergency/contingency factor mentioned above, all the debtor’s surplus income is taken in an IPO/IPA, so why should a debtor in a DRO get to keep any of it?  Well I’m sorry, Insolvency Service, but your stats indicate to me that IPOs/IPAs are so not the norm for bankrupts; it seems that there are plenty of bankrupts getting to keep at least some surplus income, so I don’t see that debtors in DRO generally are better off than their bankrupt contemporaries.

I was also surprised to read that the Insolvency Service uses the “Living Costs and Food Survey” for calculating surplus income. Considering the Service was a body that was heavily involved in the IVA and DMP Protocols, I’m wondering why they chose this tool, rather than the CFS or Step Change guidelines.  I notice that “a consultation is ongoing to produce a Common Income and Expenditure Calculator to use as an industry standard” – presumably this will be rolled out for IVAs and DMPs too and presumably these industries are engaged in this consultation?  Personally, I’ve not seen it…

Debt Camel illustrates the disparity that using different tools can generate. She states that many IPs use guidelines that are stricter than the CFS (I guess she’s referring to the Step Change guidelines?) with the result that an IVA can be proposed for £70 or £100 per month for an individual who would meet the current DRO £50 per month threshold.  Personally, I’m not surprised at this, as an individual’s actual I&E might be very different from what any model predicts they should be.  Also, just as some debtors have chosen an IVA over bankruptcy – even though, from a purely economic perspective, bankruptcy might appear the best way to go – an individual’s choice to go for an IVA over a DRO does not make it wrong.  However, given the substantial differences in downsides for the debtor, I expect that IPs dealing in low contribution IVAs would be fanatical about giving and recording thorough advice on all the options available to avoid mis-selling complaints down the line.

However, back to my question: do creditors get to see anything from £50 per month IPOs/IPAs? That’s only £1,800 over three years.  What’s the current bankruptcy admin fee: £1,715 for starters..?  If creditors only start seeing a real recovery on IPOs/IPAs at, say, £70 per month, then shouldn’t that be the threshold – for DROs and bankruptcies?

The Debtor’s Experience

The consultation then moves to examine the debtor’s experience of DROs: how much it costs them; whether it is right that they should be able to access a DRO only once in a 6 year period; whether the competent authority/intermediary model can be improved on. Personally, I cannot really add to these issues, so I won’t attempt to.

I was intrigued by Debt Camel’s comments (sorry, DC, from drawing so heavily on your post) regarding the paucity of publicity given to DROs, including on some IPs’ websites. I can see how this situation may have arisen: when DROs were introduced back in 2009, IVAs and DROs were poles apart.  IVAs were often marketed with a surplus income threshold some way above the £50 DRO limit.  Therefore, it was perhaps understandable that IVA websites rarely signposted DROs as a potential option for readers.  However, the disposable income threshold for proposing an IVA has dropped in recent times, so I can well understand that IVA providers may now look to advise individuals with a DI of c.£50.  Given this environment, it is appropriate that IP/IVA provider websites (and, of course, advisers) that purport to set out debtors’ options cover DROs.  From my own spot-check of the websites of some of the major providers, I’d say that c.50% covered DROs, although some did seem to trail after the bankruptcy blurb, which didn’t seem entirely fair and transparent.

Any lack of DRO coverage by IPs can only give weight to arguments that someone who appears to be in the region of a potential DRO candidate should be referred to an Authorised Intermediary. I also ask myself if the DRO calculator is accessible by non-Authorised Intermediaries: if IPs are to cover well DROs in possible options for a debtor, it seems to me that they must have access to it – this is another reason for addressing the lack of consistency in the tools currently in use.

DRO Revocations

The number of DROs revoked has been running consistently for the past three years at c.300 per year. Revocations most often occurred at the OR’s discretion when he felt that the debtor’s change in financial circumstances meant that he could deal with his creditors – that is how the consultation describes it anyway.  Given that the document continues to explain that 154 revocations occurred because the asset limit had been exceeded and 29 because the surplus income level had been exceeded, it seems to me that it was more all about hitting the DRO thresholds.

Interestingly, one debtor was successful in challenging the OR’s discretion. The document states that since this, “the decision to revoke following a change of circumstances is no longer being so strictly applied, with revocation now only occurring if the creditors could be expected to benefit if the DRO was revoked”.

The consultation asks whether the revocation system could be improved. My questions would be: what happens to the debtor next; are they thrown back out into the cold?  Could they not be “switched” into a bankruptcy, if the debtors consent?

DRO Discharge

The consultation asks if the Scottish MAP discharge provisions should be adopted for DRO.

Personally, I don’t understand why MAPs have different timescales: six months for discharge from debts, but with a restriction on credit for a further six months after discharge with an option to extend this restriction for a further six months. I expect that the impact of a MAP or DRO on a debtor’s credit file restricts access to credit more than the statutory provisions anyway and, if six months is considered an appropriate timescale within which windfalls should be caught for the benefit of pre-DRO/MAP creditors (although, personally, I think that one year is not too much to ask), then why not stick with that single line in the sand?

Becoming employed

Understandably, some wonder whether being in a DRO might discourage some from taking up opportunities that risk bringing them out from under that safety net – for example, taking up employment that might take their surplus income over the £50 threshold.

I think that only those who have experienced DROs – more specifically perhaps, revocations on the basis of increased income – can really answer this question. However, I wonder if such a risk might be mitigated by allowing a greater level of surplus income once someone is in a DRO.

Bankruptcy Creditor Petition Limit

Having contemplated 25 pages of DRO territory, it seemed odd to switch to this topic for the final three pages, but good on the Insolvency Service for including it. It is a simple question: the bankruptcy creditor petition limit has been £750 since 1986, so what should it be now?

The consultation sets out these facts:

• If it were increased in line with inflation, it would now be £1,600 to £1,700.
• Germany, Italy, The Netherlands and Spain have no limit.
• Australia’s is £2,700.
• Scotland’s is £3,000.
• Republic of Ireland’s is £15,900.
• If the limit had been £2,000, there would have been 404 (3%) fewer creditor petitions last year.
• If the limit had been £3,000, there would have been 979 (8%) fewer creditor petitions last year.

Personally, I don’t know where I’d put the level. I sympathise with the debtors who find themselves with a hefty bankruptcy annulment bill on the back of a small petition debt.  At the same time, I can see that creditors (even Councils) are entirely justified in using the statutory tools to pursue their debts.

Clearly, an increase is well overdue, and I hope that those with evidence-based views will help the Government decide on an appropriate level.