Are we seeing the end of bankruptcies?

In August 2023, the government announced its intention to reform the personal insolvency framework and it appears those reforms are coming into effect with the recent announcement in the spring budget.

The spring budget confirmed a number of the changes to Debt Relief Orders and many insolvency professionals have predicted that, as a result of these changes, the level of bankruptcies will reduce in the future.

In March 2024, the Insolvency Service reported that 8,708 individuals in England and Wales entered into an insolvency process. This consisted of:

• 681 bankruptcies
• 2,628 debt relief orders
• 5,399 individual voluntary arrangements (“IVAs”).

The Insolvency Service further reported that the number of bankruptcies in March 2024 was similar to numbers over the past nine months, with these continuing to decline over the years. Whereas the number of Debt Relief Orders in 2024 has risen from low numbers seen during and immediately after the Covid-19 pandemic to 32% of all individual insolvency processes in 2024.

With the cost-of-living crisis continuing to impact the UK, more people are seeking support with managing their debts and it’s evident from the current statistics that Debt Relief Orders are being used to help those struggling with problem debt.

What is a Debt Relief Order?

A Debt Relief Order, or DRO as it is also known, was a relatively unknown insolvency process which came into effect in England and Wales on 6 April 2009. DROs provided a quicker and more cost effective alternative to bankruptcy.

The application fee for a DRO – before the changes announced in the spring budget – was £90.00 compared to the significantly higher fee of £680.00 for bankruptcies.

In order to be eligible to apply for a DRO the following criteria needed to be met:

• Being unable to pay your debts
• Having debts of £30,000 or less;
• Having less than £2,000 in total assets – if the value of a single motor vehicle is £2,000 or less it can be disregarded from the total value of assets
• Having disposable income, after paying tax, national insurance, and normal household expenses, of £75 per month or less
• Having lived or worked in England or Wales in the last 3 years
• Having not had a DRO in the last six years.

Once made, a DRO will freeze debt repayments and interest for 12 months. During this time, no creditors can take any action against a debtor without the permission of the court. At the end of the period, the debtor will be discharged from their debts and those debts will be written off, provided a change in circumstance has not materialised.

DROs were aim at those people with relatively low liabilities, little surplus income and few assets who are unable to pay off their debts in a reasonable time.

On 6 March 2024, Chancellor Jeremy Hunt’s announced that from 6 April 2024 the £90 administration fee for a DRO would no longer apply and from 28 June 2024 there would be an increase in the maximum debt threshold from £30,000 to £50,000. The maximum value of a motor vehicle that can be retained is being increased to £4,000. No other changes were announced and in addition to the changes debtors will still have to meet the existing criteria.

According to the Chancellor, the aim of the changes is to improve access to this individual insolvency process.

Whilst the changes have been met with positivity, and allow better access to those whose debts fall below £50,000, it remains to be seen whether these changes will significantly impact the levels of bankruptcies in the future.