A Debt Relief Order (DRO) is a new individual insolvency procedure which came into force on 6 April 2009 and which provides an alternative route into personal insolvency for certain categories of over-indebted individuals, subject to some restrictions namely the individual must have liabilities of less than £15,000, assets of less than £300 and surplus monthly income of less than £50. The Insolvency Service (IS) published its figures on Friday 5th February and DRO’s represented 11, 831 of the total individual insolvency figures for 2009.

Almost a year on and DRO’s are still only available to individuals who meet the criteria above, however, gaining access to services who provide DRO’s is proving to be the biggest obstacle as in the case of Fred Mc Carthy,(see extract from the The Times below), who found himself struggling with debt and but for advice given by a veteran group he would have found himself in a Debt Management Plan as opposed to a DRO which, given his circumstances would likely have been unsuitable.

Mr McCarthy’s case paints a picture of a debt advice network that it is said to be struggling to cope. Citizens Advice Bureaux in England and Wales are dealing with nearly 10,000 new debt problems every working day. His story also highlights the sometimes inconsistent and confusing guidance provided by different advisers. This has prompted calls by industry experts for tighter regulation to toughen up the policing of debt advisers and to ensure that they are providing the best advice. However, you can apply for a DRO only through an approved debt adviser. The CAB says that it has more than 1,000 trained intermediaries who can advise on the full range of debt remedies, including DROs. Unfortunately, one wasn’t available at Mr McCarthy’s local branch, which recommended that he contact the debt charity Payplan. The adviser he spoke to there was “not very friendly” and he was told that, contrary to CAB’s advice, he could not apply for a DRO. Instead, Payplan recommended that he take out a debt-management plan (DMP).   

Unlike a DRO, this would not wipe out his debts. Instead Payplan would work to agree a budget acceptable to Mr McCarthy and his creditors. He should then have been able to repay his debts at a reduced and more affordable rate. Mr McCarthy decided to get a second opinion and approached the government-backed National Debtline, another charity. He says: “I was kept waiting on the telephone for nearly an hour. When I got through, I was asked about my expenditure and income and was told that I would not qualify for a debt-relief order.”It was a similar story at the Consumer Credit Counselling Service (CCCS). After giving details of his finances over the phone, it was more than a month before he was able to talk to the CCCS again, although it claims it tried to contact Mr McCarthy in that period. “The months were rolling by and I was worried that my creditors were beginning to get threatening. My wife imagined bailiffs knocking on the door.”He spoke to a number of other fee-paying debt advisers, none of whom recommended a DRO. When one offered to arrange bankruptcy, for a £1,000 fee, he phoned the British Legion, as an ex-serviceman, to see if it would pay the charge. The Legion declined his request, but one of its financial advisers said that a DRO was the best route forward, and that the Legion would even pay the required £90 fee. He says: “The British Legion came to my house and kept me informed every step of the way by e-mail and telephone. It is a big weight off my mind, even though the journey to the DRO was horrific.

Although McCarthy got his DRO in September, Payplan, National Debtline and CCCS insist that the advice he was given was appropriate. (source: The Times)

As with all new procedures, over time DRO’s will bed down and are expected to increase but individuals are still at danger from unscrupulous debt management companies who do not offer DRO’s (though granted, many people don’t always fit the strict criteria).

The Insolvency Service reported that some of those who had a DRO approved would have been declared bankrupt had the DRO route not been an option, but said it was not possible to quantify this proportion.

The worrying trend for DRO’s is seemingly access and satisfying the strict criteria, the effect will only become clearer once they have been in place for some time.

Will the new comer pass the test or will it need to be re vamped to make it more accessible to the individuals it is meant to help?

Blayne (Mar 2010)

This makes for some sober reading, particularly if looking at the total number of individual  insolvencies- the figure is an astounding 134,142- an increase of 26% from last year. Representing:

74,670 bankruptcies

47,641 IVA’s

11,831 DRO”s

This is the highest total since official records began in 1960.

Albeit that the economy is slowing recovering, people made unemployed or redundant last year are still feeling the effects, not helped by lenders and institutions taking a hard line with individuals.

Creditors have also started to get tough, according to Louise Brittain of Deloitte. This was reflected in the jump in IVAs, when individuals come to an official deal with their creditors.

“This is a result of increased creditor pressure which is unlikely to let up any time soon, and highlights the desperate financial difficulties facing individuals,” she said.

She added that the rise at the end of 2009 was surprising given that many people tended to delay dealing with acute debt issues until after Christmas. IVAs could also have risen as people cutting hours instead of being made redundant had some funds to pay back debts instead of going bankrupt. Many experts have suggested that there will be more pain to come despite the UK coming out of recession.

“We expect to see the numbers continue to rise as the upwards trend in personal insolvencies traditionally continues for nearly three years after the worst of a recession has passed,” said Pat Boyden, from accountancy firm PricewaterhouseCoopers.  (source BBC news)

B Layne

clampdown on firms which promise to help struggling borrowers repay debts could lead to unscrupulous companies being banned.

The Office of Fair Trading is launching a probe into debt management firms following fears that consumers who are already in distress are being left worse off. Misleading advertising and poor advice can result in borrowers signing up to costly and inappropriate plans.

There are about 150 debt management companies which claim to put borrowers with several debts on to repayment plans. They negotiate with debt collectors and credit firms to get interest payments frozen and repayments lowered.

However, some firms falsely claim to be charities or government-backed. Others have made unlawful, unsolicited calls and sent mailings about repayment plans to customers already laden with debt.

The companies make their money from commission paid by credit firms. However, many also sell insurance alongside the debts.

In particular, the OFT will probe online advertising.

Source Daily Mail

People behind with payments on their homes will have a new way of finding the best solution to their arrears problems from this week, with the publication of information and advice by the Ministry of Justice.New animated videos, interview clips and articles, to be featured on the Directgov website go from the point where there may be a problem, to communicating with landlords or mortgage lenders, how to prepare for court and what happens during and after a court hearing.Justice Minister Bridget Prentice said:‘The government has taken considerable steps to ensure people struggling to pay their rent or mortgage get the help they need to stay in their homes.‘Mortgage repossession figures released earlier this month show that the number of people facing repossession has considerably reduced since this time last year, but we’re not complacent. The information being made available today is easy to understand and accessible via the Directgov website and aims to help people find a way out of their financial difficulties and avoid repossession.’

District Judge Stephen Gold, who appears in several of the videos, said: ‘The worst thing you can do if you are in arrears is ignore the problem. Get impartial advice from an expert. Free advice should be available to you. Find out about the court process – it’s not as complicated as people think and, most important of all, talk to your mortgage lender or landlord. You may be able to reach an agreement about clearing the arrears and avoid court altogether.’The videos and articles are designed to answer questions asked by people in arrears.  Key points include how to avoid having to go to court altogether, as well as who may be able to help you deal with any debt or financial problems you are facing.There is also practical information on the court process, the kinds of question the judge may ask, and what can happen after a court hearing.In response to the publication of rent and mortgage arrears advice online by the Ministry of Justice, a spokesperson from housing and homelessness charity Shelter, said: “Getting advice early is crucial in helping people keep their homes so it is absolutely right that Government is seeking new channels to help people access the advice they need.

“However, if we are serious about tackling rising repossessions, we need tougher and more effective regulation of lenders and we look to the FSA mortgage market review in autumn to urgently address this.”

R Lacey

  The UK’s largest survey of student finance, published this week by Push, the UK’s leading independent resource for prospective students, reveals that students who started at university last year are expected to owe nearly £21,200 by the time they leave with this Autumn’s new intake of students owing an additional £2,000 by the time they graduate. The annual survey of over 2,000 students at 137 university campuses has found that student debt has topped £5,000 for each year of study for the first time. The increase of 10.6% is thought to be in part be down to availability of part-time and temporary jobs during the recession. 80% of students were said to rely on part time or holiday jobs to supplement their income by an average of £2,00 a year, but as the recession continues to bite such jobs are becoming increasingly harder to find. 

The different funding arrangements around the UK are also reflected in the data. In Scotland, which has the most generous funding system, debts have actually fallen to £2,194 a year and are much lower than the rest of the UK. Meanwhile, with an average of £5,271, students in England owe £205 for each year more than the national average.  

The survey revealed considerable variation between individual universities. The national average projected debt on graduation stands at £15,812, but at 6 universities, the figure has already broken the £25,000 barrier. However, in Scotland, borrowing is likely to remain under £10,000.  

Johnny Rich, Editor of Push.co.uk, commented: “With the economy in recession, students are even more concerned about debt than they have been in recent years. Finding part-time work has got harder and many students are facing real financial hardship and are worrying about what lies ahead. Even so, the advantages of having a degree still vastly outweigh the costs and the Push survey shows that – with high quality advice and information – students can keep their debts down while still enjoying the benefits of university.

“These figures will give next year’s review of student funding a real headache. They beg the question whether we’ve now passed the point where students can be expected to stump up any more towards their education.”

 R. Lacey

Statistics published this week by the Council of Mortgage Lenders (CML) show that the number of mortgage possessions fell in the second quarter of the year, while cases of arrears leveled off. 

A combination of factors has helped keep mortgage arrears and possessions in check, despite the recession.  Low interest rates are helping ensure that arrears grow less quickly, giving borrowers a better chance of getting back on track and lenders more scope to extend forbearance and government schemes are providing some help for borrowers in difficulty by promoting early communication between borrowers, lenders and debt advisers.  The CML reported they were pleased to see that lenders are showing forbearance to borrowers when customers are trying to resolve their payment problems and have a realistic chance of doing so

However, while the figures reflect the efforts being made to manage mortgage arrears and avoid possession if possible, the CML warned that there can be no complacency about the potential scale of future payment problems. The economy remains weak and with unemployment still growing, it is predicted that arrears and possessions are likely to rise in the second half of the year.

The figures show that there were 11,400 cases of possession (equivalent to one mortgage in 1,000) in the second quarter of 2009, 10% fewer than the 12,700 in the first quarter of the year but 14% more than the 10,000 cases of possession in the second quarter of last year.

The data also shows only a modest deterioration in arrears during the second quarter. As at mid-year, the number of loans in arrears by 2.5% or more of the outstanding mortgage balance totaled 205,600 (1.85% of all loans). That compares with a total of 203,900 at the end of the first quarter, and 139,700 at the end of the second quarter of 2008. The level of arrears of three months or more is somewhat higher at the end of June, the number of three months-plus cases stood at 270,400 (2.43% of mortgages), compared with 264,700 (2.38%) in the first quarter and 152,700 in the second quarter of 2008.

This mean that the total number of possessions in the first half of 2009 stands at 24,100, compared with the CML’s forecast for the whole year of 65,000. The half-year total of 205,600 mortgages in arrears by 2.5% or more of the outstanding mortgage balance compares with their forecast of a total of 360,000 by the year’s end. In June, the CML revised downwards their expectations for arrears and possessions for the year as a whole, and stated they will continue to monitor developments and keep their forecasts under review.

Commenting on the data, the CML’s head of policy Jackie Bennett said:

“With unemployment rising and the economy still weak, the outlook will remain challenging for the rest of this year and into 2010. But the data shows that lenders are committed to helping borrowers manage their way through temporary payment problems and get their mortgage back on track over time, avoiding possession where possible. 

“Clearly, low interest rates are also helping borrowers who are committed to working to resolve their arrears, paying what they can - and when they can - towards their mortgage, and maintaining good communication with their lender.

“Lenders can only show forbearance if borrowers show a continuing determination to address their problems and discuss them with the lender at the earliest opportunity. So, the key message continues to be to talk to your lender as soon as possible when difficulties emerge and take advice from an independent money adviser if you have other debts as well as your mortgage.”

R Lacey

Registered UK charity, the Debt Advice Foundation, which promotes research and education around debt issues, has launched a freephone hotline to help deal with the increasing demand for support from people struggling with debt and money worries. The telephone service, along with the new Debt Advice Foundation website launched on Monday 10 August 2009. It follows a 27.4% increase in the number of people turning to personal insolvency (IVA or bankruptcy) during April to June 2009 compared with the same period last year and reports that existing charities/agencies are struggling to cope with the increased demand for help.

The Citizens Advice Bureau alone receive an average of 7,241 new debt cases every working day and its debt enquiries are up 21% this year compared with 2008.

Chairman of the Debt Advice Foundation, Dennis Benson said: “As the recession bites, the number of people facing debt problems is rising, with personal insolvencies now at a record high. Traditional support services are struggling to cope with increasing demand, and Money Advice Trust, the government backed debt support agency has predicted that half of the four million people expected to be seeking debt advice this year are unlikely to get an appointment with a debt charity. “With growing numbers of people seeking guidance it’s clear that the need for good quality, independent and responsive free advice around debt and money matters is greater than ever. That’s why the Debt Advice Foundation has launched this new service, which means free access to a trained debt counsellor is now just a phone call away. It’s also the reason we have launched our website to include more detailed information about the options available to people in debt.”

The Debt Advice Foundation helpline is staffed by trained counsellors who will work with callers to discuss the situation and make an initial assessment of their circumstances. The counsellors can provide simple guidance as to how to deal with creditors, through to advice on debt solutions such as Debt Relief Orders, Debt Management Plans, IVAs and bankruptcy. Counsellors are also able to help callers set up an appropriate solution for their circumstances and negotiate with lenders on their behalf.

Dennis explains: “Because the Debt Advice Foundation is a charity, our advice is always

provided for free and without judgement, and callers can be certain that our recommendations are wholly impartial. If you approach a commercial debt advisor, you will sometimes have to pay a fee – particularly in the case of Debt Management Plans.

“Our message to people in debt is don’t panic. There is a way out and there is help available.

You don’t have to face your debts alone - charities like ourselves are here to provide advice and information and to help you put a workable solution in place to tackle problem debt as quickly as possible

R Lacey

The Treasury Committee released a report this week entitled, Mortgage arrears and access to mortgage finance, which focused on households affected by the recession, struggling with mortgage arrears and/or at risk of repossession.

The Report reveals that both mortgage arrears and repossession levels are on an upward trend as a result of the recession, with both expected to continue rising over the next few years. The Committee acknowledges that many mainstream lenders are taking pro-active steps to support consumers in mortgage difficulties, but expressed concern at the lack of flexibility and forbearance shown by some lenders in the sub-prime, specialist and second charge sectors towards homeowners in arrears.

John McFall, Chairman of the Committee said: “Losing the family home is one of the most distressing experiences a family can go through. We have heard harrowing tales of households struggling to keep their heads above water in an attempt to avoid repossession. The next few years are likely to see the number of families in mortgage difficulties rise steeply. This is why it is so important to ensure that lenders are complying with the rules to only use repossession as a last resort and that the FSA is enforcing those rules properly.

The Committee was extremely concerned by evidence that many sub-prime, specialist and second charge lenders are using repossession not as a tool of last resort, but instead of first resort. This is clearly unacceptable - the FSA and the OFT must get a grip on this problem and crack down on lenders who are breaking the rules and mistreating customers in arrears.” 

The Committee shared the concern expressed by many of those who gave evidence to its inquiry that some lenders are charging high and excessive mortgage arrears fees to customers who fall into mortgage difficulties. The Report voices concern that in many instances such charges appear to go beyond the recovery of additional administrative costs and are being used instead as an alternative profit stream.

The Report describes such practices as ‘intolerable’ and calls upon the FSA to take a much more robust stance towards tackling and eliminating unfair arrears charges. It recommends that lenders should be required to provide an itemised breakdown of the additional costs their arrears charges are supposed to cover.

John McFall, Chairman of the Committee said: “We have heard evidence of charges as high as 35 pounds from some lenders for simply sending a letter or making a phone call, and charges as high as 150 pounds for a visit from a so-called ‘debt counsellor.’ Such practices are intolerable and are placing additional financial as well as emotional strain on those already struggling to keep a roof over their head.

We suspect that the small number of cases being brought against lenders making excessive arrears charges are merely the tip of the iceberg. This is why it is so important that lenders are compelled to open up their books and justify their charges, while the FSA must be prepared to take decisive action where it finds evidence of wrongdoing.”

The report welcomed the measures the Government introduced to support homeowners in mortgage difficulties. However, the need for the introduction of a large number of new initiatives as well as the amendment of schemes in place before the current crisis suggests that adequate safety nets for homeowners in mortgage arrears and/or at risk of repossession were not in place prior to the current recession. The Report recommends that the Government re-examine its longer-term strategy towards supporting homeowners in mortgage difficulties to ensure that adequate mechanisms to support homeowners are in place even once the current downturn has ended.

The Report also notes that Mortgage Rescue Scheme has directly benefited just six households, despite being designed to assist upwards of 6,000. John McFall, said: “The Mortgage Rescue Scheme was designed to assist upwards of 6000 households, but thus far only six households have directly benefited from the scheme. I am looking for answers as to why this is the case and whether low take up reflects poor scheme design or an inability to forecast take-up.”

R Lacey

Personal insolvency figures in England and Wales rose to more than 33,000 in the second quarter of the year, the highest since 1960 when records began, the Insolvency Service announced this week.

The total of 33,073 reveals a steep increase of 9 percent from the first 3 months of the year alone and 27 percent higher than the same time the previous year, as the recession, rising unemployment and falling house values along with the reluctance of banks and other financial institutions to lend to individuals took their toll.

Of the total number made insolvent, 18,870 were declared bankrupt, a 15 percent increase on the same period last year and 12,225 entered into individual voluntary arrangements, known as an IVA, a legally binding formal agreement with creditors to make reduced payments towards the total amount of your debt in order to pay off a percentage of what is owed.

In addition, 2,000 people signed up to debt relief orders (DRO), a new type of insolvency agreement introduced in April 2009 for those with relatively small amounts of borrowing. Counted for the first time, there were 1,978 DROs in April, May and June. The DRO is a new and cheaper form of insolvency procedure aimed at helping people wipe the slate clean if they have debts of less than £15,000 and few assets.

Insolvency experts warned that the combination of rising unemployment and the lack of stigma attached to options such as IVAs and debt relief orders meant the number of people affected would go on rising.

R Lacey

Shelter, the Housing and Homelessness charity, is calling on struggling homeowners considering using a private sale and rent back scheme to make sure the company they use is regulated before making a commitment about their property. With effect from 1 July 2009 all private sale and rent back companies are required to be regulated by financial watchdog The Financial Services Authority (FSA) or they are operating illegally. Shelter has urged vulnerable home owners to think very carefully before entering any arrangement, and to make sure their company is authorised by the FSA before signing up to any schemes.