DEBT RELIEF ORDERS - ELIGIBILITY
DROs are aimed at debtors who are unable to access debt relief through existing debt solutions such as bankruptcy, debt management plans or administration orders. To ensure that the scheme is available to the debtors it is aimed at and, also, that it is affordable to administer, the legislation sets some criteria which a debtor must meet in order to be eligible for the scheme.
The eligibility cover matters such as total debt, asset level, income surplus and repayment ability.
The basic criteria that a debtor has to satisfy if he/she is to be successful in an application for a DRO are as follows:
The relevant date for deciding eligibility is the date of determination of the application by the official receiver (see Part 3).
So far as deciding if a debtor is not in a position to pay their debts, the official receiver is entitled to presume this is this case if it appears to be so based on the contents of the debtor’s application – assuming information to suggest otherwise is not known to the official receiver [note 11].
In essence, it would be fair to say that a debtor who meets the criteria regarding surplus income (that is, that surplus income is less than £50 per month) and asset level (assets less than £300) is likely to be in a position of being unable to pay their debts.
If the debtor was anticipating a lump sum (perhaps, from a pension) within the 12 months of the DRO, then it is unlikely that a DRO would be appropriate as the process is aimed at those whose circumstances are not expected to improve.
To be eligible for a DRO, the total amount of the debtor’s liabilities, other than unliquidated debts and excluded debts must not exceed £15,000 [note 12] [note 13]. Debts that are liquidated (see paragraph 46.10) and not excluded (see paragraph 46.17) are known as qualifying debts (see paragraph 46.9) [note 14]. Unliquidated debts and excluded debts are not included in the calculation of total indebtedness but, equally, those debts will not be subject to the moratorium period (see paragraph 46.74) or discharged (see paragraph 46.82).
A qualifying debt is a debt that is:
A debt is not a qualifying debt to the extent that it is secured.
The legislation gives the definition of a liquidated debt as a debt that is for a liquidated sum payable to a creditor either immediately or at some future time [note 15]. Paragraphs 46.11 to 46.15 to give examples of situations where debts may be considered liquidated and payable immediately or at some certain future time (or not, as the case may be).
Rent arrears outstanding at the date the DRO is approved are considered to be liquidated (in that the sum outstanding is quantified in the rental/tenancy agreement) and, generally, the arrears are payable immediately. Where the debtor has entered into a payment plan with the landlord, the debt would qualify on the basis that it would be due at some certain future time.
The ability of a landlord with a defaulting tenant to recover possession of the property is not affected by the granting of the DRO.
The Regulations relating to the collection of council tax, provide that the local authority issue a bill which sets out a scheme for the individual to pay the sums on account through the year by way of instalment – usually 10 instalments [note 16] [note 17]. As the first day of the month in which each of these instalments is due is passed, so that part of the debt (if unpaid) will become a qualifying debt.
If the instalments are not paid on time the relevant Regulations provide for a series of reminder notices to be issued. If a first reminder is issued and the recipient fails to pay the unpaid instalments within 14 days the whole of the council tax for the year becomes payable. If the arrears are paid within the 14 days, but future arrears result in the issue of another reminder, then the whole of the council tax becomes immediately payable (there is no 14 day repayment period for a second reminder [note 18]. Where, as a result of the one of these events, the year’s council tax becomes immediately payable it is considered that the debt has been liquidated and would, therefore, become a qualifying debt in a DRO.
Only those income tax debts that are determined (by returns or assessments) by HM Revenue and Customs at the date of the application for the DRO can be considered to be a liquated debt and be a qualifying debt for the purposes of a DRO.
Where a debtor has committed an act that may result in another party making a legal claim (or similar) (for example, causing a personal injury – though see paragraph 46.22), the liability in this regard can not be a qualifying debt until there is a judgments (for example, a court order or judgments) ordering an amount to be paid.
A debt is not a qualifying debt to the extent that it is secured. There is no special meaning to the term “secured” in the legislation.
Any fine imposed for an offence (including an obligation to pay a lump sum or to pay costs) is an excluded debt.
Fine is defined as “any pecuniary penalty or pecuniary forfeiture or pecuniary compensation payable under a conviction” [note 20].
This definition may be taken to include a compensation order made under the Powers of Criminal Courts (Sentencing) Act 2000 [note 21].
Any obligation (including an obligation to pay a lump sum or to pay costs) arising under an order made in family proceedings or any obligation arising under a maintenance assessment made under the Child Support Act 1991 is an excluded debt [note 22].
Any obligation arising under a confiscation order made under the following Acts:
is an excluded debt [note 23].
Any debt or liability to which a debtor is or may become subject in respect of any sum paid or payable to the debtor as a student by way of a loan and which he/she receives before or after a debt relief order is made in respect of him/her is an excluded debt [note 24]. In this context, “loan” means a loan made pursuant to, either the Teaching and Higher Education Act 1998 or the Education (Student Loans) Act 1990, and includes any interest on the loan and any penalties or charges incurred in connection with it.
Where the DRO application is made on or after 6 April 2010, any debt which consists of a liability to pay damages for negligence, nuisance or breach of a statutory, contractual or other duty, or to pay damages under Part 1 of the Consumer Protection Act 1987 (which deals with product liability) – being in either case damages in respect of the death or personal injury (including any disease or other impairment of physical or mental condition) to any person is an excluded debt. [note 25].
(Added March 2012)
Where the DRO application is made on or after 19 March 2012 the liability to repay monies owed to DWP regarding a budgeting or crisis loan (granted from the Social Fund) is an excluded debt.
Note: [Rule 5A.2 as amended by the Insolvency (Amendment) Rules 2012]
The debtor must have a gross property (see paragraph 46.24) level of less than £300 to be eligible for a DRO. As the property level is gross (rather than net) it is highly unlikely, if not impossible, that a homeowner would meet this condition.
There are certain items that are disregarded when calculating the property level of the debtor. The disregarded property provisions [note 26] are roughly in line with the provisions in the act relating to exempt property (see Chapter 30, Part 1) and are intended to ensure that the relevant asset value is that which would be value of assets available to a trustee in bankruptcy.
Property is defined in the Act as including “money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property” [note 27].
Apart from disregarded property (see paragraphs 46.25 and 46.27), a debtor’s property is considered to be all property vested in the debtor at the date of determination of the application (see Part 3) [note 28].
A single domestic motor vehicle which is worth less than £1,000 will be disregarded when determining the debtor’s total gross property [note 29] [note 30]. The maximum value for the vehicle is £1,000, and cannot be combined with the £300 – which is ring-fenced for other property.
Alternatively, a motor vehicle that has been specially adapted for use by the debtor, because he/she has a physical impairment that has a substantial and long-term adverse effect on his/her ability to carry out normal day-to-day activities will be disregarded when calculating the debtor’s total gross property [note 31].
Only one vehicle may be disregarded per debtor [note 32].
A vehicle on hire-purchase is not considered to be an asset and is not, therefore, taken into account when calculating the total value of the debtor’s property.
Where it appears to the official receiver that the realisable value of the whole or any part of the value of property disregarded as tools of the trade or household effects, or a vehicle disregarded as being specially adapted, exceeds the cost of a reasonable replacement then he/she will disregard only the value of a reasonable replacement.
For example, were the debtor to own household effects with a realisable value of, say, £1,000, the official receiver may consider that reasonable replacements may cost £600. In these circumstances the disregarded property level would be £600, leaving the debtor with property of £400 and excluding him/her from eligibility to be subject to a DRO.
In the calculation to establish the debtor’s property level (see paragraph 46.23), the value of a pension must be taken into account. The provisions of The Welfare Reform and Pensions Act 1999 have no effect in this regard as those provisions serve only to exclude a pension from a bankrupt’s estate (see paragraph 61.2).
Depending on when a DRO application is made, the debtor may have a bank balance in excess of £300 (for example, if they have just been paid). Intermediaries (see Part 6) are expected to take a “rounded” view of the situation, and only list the amount of the balance that will remain after essential household expenditure has accounted for.
A debtor’s disposable income, following deduction of normal household expenses must not exceed £50 per month for him/her to be eligible for a DRO.
There is no guidance in the legislation as to what are to be considered normal household expenses and, to a certain extent, this will depend on the particular circumstances of the debtor. The approved intermediaries (see Part 6) who make the application for the DRO on behalf of the debtor (see Part 2) are expected to ensure that the expenses of the debtor are within normal levels (see paragraph 46.33).
The Rules provide that the income of a debtor comprises every payment in the nature of income which is from time to time made to him/her or to which he/she from time to time becomes entitled, including any payment in respect of carrying on of any business or in respect of any office or employment and any payment under a pension scheme [note 34].
Any contribution made by any member of the debtor’s family is to be taken into account when calculating the monthly surplus [note 35].
In the main, the approved intermediary will complete a Common Financial Statement (CFS) as part of the application process. This is an electronic form devised by the Money Advice Trust and created using data obtained from the Family Expenditure Survey produced by the Office for National Statistics. The form contains “trigger” points to show up areas where the debtor’s expenses might exceed those considered normal and is accepted as a standard tool in the debt advice sector. It is the responsibility of the intermediary (see Part 6) to ensure that the debtor’s expenses do not exceed the trigger points.
To maintain the integrity of the CFS, the levels of the trigger points are not widely circulated.
The employment (or otherwise) status of the debtor will not affect their ability to enter into a DRO so long as the debtor’s income, following deduction of normal household expenses, does not exceed £50 per month.
If, at the time of application, there is an expectation that the debtor’s position, as regards income, will improve to the extent that the increase will take their surplus income over £50 (for example, if a pension is due to come into payment) then it would normally be considered that the individual will not be eligible for a DRO.