Shelter's Specialist Debt Advice Service explains when a debt must be included in a DRO, and when your client could leave a debt out of their application.
The conversation so far
Debt relief orders (DROs) were introduced in 2009 as a low-cost alternative to bankruptcy for people with few assets and little or no disposable income. Bankruptcy includes all debts except those excluded by law. There is no option to pick and choose which debts are included and which, if any, are left out.
Here at Shelter's Specialist Debt Advice Service, we have long wondered if this position is mirrored for DROs or if the framing of the relevant rule conveys a different intention.
Insolvency Rule 9.3(10) says: 'A debtor may include a debt of which payment is not yet due at the date of the application if it is for a liquidated sum payable at some certain future time.'
This means that debts not in arrears or payments that have not yet fallen due can qualify for a DRO. It is how intermediaries can include future payments under a loan agreement, as long as the client is liable to pay them at some point in future.
The word may suggests that a debt not in arrears or otherwise not yet due does not need to be included in the application. In a more recent development, the Insolvency Service DRO team has confirmed that they agree with this interpretation of the Rule.
In theory, a client could include the arrears of an unpaid debt in the DRO, and omit future payments as long as the agreement has not already been terminated. In practice, the creditor is likely to take steps to terminate the agreement if that happens.
Historic application to hire purchase agreements
DRO intermediaries will no doubt be aware that this provision has been applied to hire purchase agreements for vehicles for many years.
Insolvency Service guidance has long stated that a finance agreement for a vehicle can be omitted from a DRO, as long as the payments are up to date. Detailed guidance exists about when the monthly instalment can be treated as an 'allowable expense' for determining disposable income.
When a client might prefer to omit a debt
There are occasionally good reasons for a client to refrain from listing a debt in the DRO. Generally, omitting debts defeats the purpose of going through an insolvency process, so clients should think carefully about whether it is in their best interests.
The DRO does not protect the client from enforcement of a debt they have chosen to omit.
Essential goods or services
One reason to omit a debt is that including it will result in the loss of essential goods or services. Essential services include mobile phone contracts, broadband, and entertainment packages.
This is the same principle as with hire purchase, and payments towards the service are an allowable expense if the service meets a reasonable domestic need.
Loans from family and friends
The client's relationship with the creditor is another factor to consider.
Many people in debt have borrowed money from a family member or friend. Sometimes that person has taken out credit because the DRO applicant cannot pass referencing checks. Understandably, clients don't usually want to put their relationship with the person at risk, so they might want to keep up payments. However, the payment is not likely to be an allowable expense.
Written off and statute barred debts
There might be a good reason to omit a debt that the creditor has written off or lost the right to recover. This is only likely to come up if the client's debts exceed the total debt limit if it were included. Otherwise, it's safest to include the debt in case of a future dispute.
Money owed to loan sharks
Extra care must be taken with illegal money lenders. Listing the debt in the DRO application could put the client and their family at risk if it results in the Insolvency Service contacting the loan shark.
People who lend money without the required FCA authorisation commit a criminal offence and cannot recover debts through the courts.
If the client is in danger, consider whether they need to hide their address from the Individual Insolvency Register.
How the omitted debt is treated in the DRO application
As usual with DROs, it's not as simple as leaving the debt off the application entirely. Intermediaries must consider the effect on the total debt limit and the impact on surplus income.
Does the omitted debt count towards the £50k debt limit?
The Insolvency Service has confirmed in writing to Shelter that where the continuation of a service depends on the DRO applicant maintaining payments, the balance of the omitted debt does not count towards the total debt limit.
Buy Now, Pay Later agreements such as Klarna and Clearpay can be omitted, but the outstanding sum counts towards the total debt limit.
Are payments an allowable expense when calculating disposable income?
A client qualifies for a DRO if their monthly surplus income is not more than £75 per month. To reach a figure for surplus income, intermediaries must subtract expenses for the reasonable domestic needs of the client and their family from their income.
Ongoing payments to an omitted debt are an allowable expense if payment fulfils a reasonable domestic need.
Some payments are always classed as meeting a reasonable domestic need. They include payments towards:
car insurance finance
mobile phone airtime and handsets
TV, broadband, and entertainment packages
vehicles worth up to £4k on hire purchase or conditional sale
vehicles on hire purchase or conditional sale that have been adapted for a disabled person
Payments towards a vehicle on hire purchase or conditional sale worth more than £4k might be allowable in exceptional circumstances.
Procedure for omitting a qualifying debt
The Insolvency Act 1986 requires a DRO application to include '...a list of the debts to which the debtor is subject at the date of the application, specifying the amount of each debt.'
It is an offence to knowingly or recklessly make a false representation or omission when making the application. This means the intermediary must make the Insolvency Service aware of the debt, even if it is not to be included in the DRO.
The Insolvency Service has asked that details of the debt to be omitted are supplied alongside the application. It stated: 'full disclosure may avoid an application being declined, or after approval, being revoked'.
Intermediaries can supply the necessary details in the Approved Intermediary notices within the application, or in a separate email alongside the application.
The DRO intermediary is not automatically required to list an omitted debt as a preference in the application, though omitting the debt does not relieve the client of the duty to report an existing preference.
Where to get advice and information
Shelter's Specialist Debt Advice Service can support debt professionals with enquiries about debt relief orders.
Read about Qualifying debts in a DRO application and Written off debts on Shelter Legal.
The Insolvency Service has published DRO guidance for debt advisers on Gov.UK.
The Insolvency Rules 2016 are available on Legislation.gov.uk.