Debt Relief Orders

Debt Relief Orders
Background
Existing debt relief remedies either require people in debt to have
assets or funds available to distribute to their creditors, the case
with Individual Voluntary Arrangements or Debt Management
Plans, or have other financial barriers that make them essentially
inaccessible to poorer people. The charge for going bankrupt is
about £500, placing it out of reach of many debtors.
In order to provide people in debt with better access to debt
relief, one of the measures being introduced by the Courts,
Tribunals and Enforcement Act 2007 is a procedure called a
Debt Relief Order (DRO). They are aimed a debtors who have
relatively low liabilities, little surplus income and few assets.
The orders came into force in April 2009.
How will a DRO work?
In order to eligible for a DRO a
person must:
• be unable to pay their debts
• have unsecured debt of less than
£15,000
• assets worth less than £300 (except a
car which can be worth up to £1000)
• a disposable income of less than
£50 a month after normal household
expenditure
Individuals complete an application and
apply for the order online, through an
authorised intermediary. The intermediary
will be an expert in debt advice, for
example, the Citizen’s Advice Bureau
(CAB). A DRO can only be obtained with
the assistance of the intermediary.
There is a £90 fee for the application,
which can be paid in instalments.
The orders are be made by the Official
Receiver (OR), a branch of the Insolvency
Service, rather than the Courts. The
Official Receiver has the power to refuse
the order or delay it pending further
information from the applicant.
The DRO will prevent enforcement
action being taken against the debtor by
their creditors. The order will last for 12
months after which time the debts will
generally be written off.
What are the consequences
of a DRO?
The Government is very clear that DROs
should not be seen as an easy way for
people to get rid of their debt. Therefore,
for the duration of the order, debtors will
be subject to similar restrictions as a
bankrupt including:
• Being unable to get more than £500
of credit without disclosing the DRO.
• Forming or acting as a Director of a
limited company.
• Continuing an existing business
under a different name without
disclosing the DRO.
About R3
R3 – The Insolvency Trade Body –
represents 97% of all licensed Insolvency
Practitioners (IPs) who help individuals
and businesses in financial trouble. There
are approximately 1,700 IPs in the UK,
who are licensed and regulated to give
best advice and apply statutory, licensed
procedures. Whether as accountants
or lawyers, IPs deal with personal and
business insolvencies, from large to small
businesses; and help from ‘turnaround’
to formal insolvency procedures. 89%
of IPs state that that they give their first
hour of advice for free.
People who are awarded DROs will also
have their name placed on a register at
the Insolvency Service (as bankrupts do)
and their credit rating will be affected in
the same way.
There will be civil and criminal penalties
for people who abuse the system. The
Official Receiver has the power to revoke
the order if the applicant is found to have
failed to give an accurate account of their
financial affairs.
The OR will also be able to apply for a
Debt Relief Restrictions Order which
can extend the period of the restrictions
for up to 15 years for debtors who
have been dishonest or culpable.
What does R3 think of DROs?
While R3 is supportive of measures
to offer help to people who have
no reasonable prospect of paying
back their debt, concerns about
the operation of DROs remain.
Resources
The Insolvency Service estimated that
there would be 21,000 applications for
DROs in the first year with a maximum of
43,000 in the second year of operation.
However, the Citizens Advice Bureau
(CAB) has indicated that as many 50,000
of the people it sees annually would be
eligible for DROs. As the CAB is currently
just one of six intermediaries currently
registered, the actual figure may be
much higher.
Clearly, this is a massive increase on the
predictions and R3 is concerned that
demand for DROs will result in resources
being drained away from other, already
under funded, areas of the Insolvency
Service.
The introduction of a similar scheme in
Scotland (the Low Income Low Assets
(LILA) route into bankruptcy) caused such
problems. It had been anticipated that
about 3000 people would apply for LILAs
when they were introduced. However,
statistics show that in the first three
quarters of 2008/09, there were 7,133
applications for the procedure. Figures
for the full year are likely to show that
demand for LILAs was more than three
times greater than had been anticipated.
Moreover, a survey of R3 members in
Scotland compiled after the introduction
of LILAs showed that the majority felt
there had been noticeable delays in
other areas of work at the Accountant in
Bankruptcy (the agency with responsibility
for personal insolvency in Scotland).
Fact-checking
A DRO will only be obtainable through an
intermediary. However, it is not clear how
rigorous their fact-checking will be.
Currently in the UK, in order to achieve
some element of debt write off, it is
necessary that a procedure has either
court oversight (as in bankruptcy) or
involvement on the part of the creditor
(an Individual Voluntary Arrangement,
for example). Such over-sight and
involvement acts as an important check
to prevent unscrupulous individuals from
abusing the system.
Rigorous fact-checking and over-sight
on the part of the Official Receiver will
therefore be necessary to ensure that
this new procedure is not abused. R3 is
concerned that if the number of DROs
outstrips estimations, the resources
might not be adequate to provide this.
Variety of new debt
relief procedures
DROs are just one of a range of new
procedures being put into place to
help over-indebted individuals. If all
the proposed procedures become a
reality, over-indebted individuals will
have to choose between at least six
different options depending on their
circumstances.
Though R3 doesn’t have strong
objections to any particular measure we
believe that they are being introduced
in a piecemeal and disjointed fashion,
without any discernable, coherent policy
to tackle the underlying problem of
personal debt.
Having to choose from such an array
of options has the potential to be very
confusing, both for individuals who need
help, and debt advisors who are charged
with helping them. This is compounded
by the fact that the procedures are
inconsistent in their approach, scope
and effect, especially when considered
alongside existing measures such as
bankruptcy. For example, certain debts
such as rent arrears and council tax
debt appear to be excluded from some
procedures but included in others.
The potential for confusion is a particular
cause for concern given that a recent
“Debt Tracker” survey carried out by
YouGov has shown that individuals
in the UK are still resistant to seeking
professional advice. Only 37% of
people who had ‘fallen behind with
many bills or credit commitments’
had sought debt advice, meaning that
they are less likely to be fully informed
about the options available to them.
Rehabilitation of debtors
DROs carry many of the same
consequences as bankruptcy (with
the exception of the advertising of the
individual’s name) and it is clear that
these are intended to prevent individuals
from using the process to rid themselves
of debt. Bearing in mind the restrictions
that will be placed on individuals upon
being granted a DRO, R3 would like to
be certain that the consequences will be
made very clear to applicants and that
they will not be encouraged to see the
procedure as a “soft option”.
Furthermore, R3 believes that such debt
relief procedures should be accompanied
by a financial education programme so
that debtors are genuinely rehabilitated
and, encouraged to learn skills to
hopefully avoid financial distress in
the future. Amongst others, YouGov’s
‘Debt Tracker” survey has shown that
many UK individuals have begun to see
debt as a way of life. In providing financial
education, this assumption and some of
the other, underlying causes of personal
debt can be tackled.
Debt Relief Orders

Leave a Reply

Your email address will not be published. Required fields are marked *