With the economy in recession and people's personal finances being put under ever increasing pressure, the Insolvency Service this week introduced an alternative to bankruptcy which could assist up to 50,000 people this year.
Debt Relief Orders came into force on April 6 and are a formal insolvency process intended to help individuals with a relatively low level of debt, little surplus income and minimal assets. In order to be eligible for a DRO an individual must meet the following conditions:
- They must be unable to pay their debts as and when they fall due;
- Their debts must total less than £15,000;
- They must have assets of no more than £300 (although the debtor may own a car to the value of £1,000);
- Their disposable income must total less than £50 a month (after taking away tax, national insurance contributions and normal household expenses);
- The individual must live or at some time in the last 3 years have been living or carrying on business in England and Wales; and
- The individual must not be involved in any other formal insolvency proceedings or have been subject to another DRO within the last 6 years.
The Orders will be dealt with by the Insolvency Service without the need for court proceedings and administered by approved intermediaries who are trained debt advisors. DROs will last for 12 months, during which time creditors that are included in the DRO will be prohibited from pursuing any legal action for the repayment of outstanding debts and at the end of the 12 month period these debts will be written off unless the individuals financial situation has significantly improved.
The Insolvency Service are keen to point out that the new regime should not be seen as an easy way for people to run up debts and then have them written off. Anyone subject to a DRO will be not be permitted to obtain credit of £500 or more, will be prohibited from being involved in the promotion, formation or management of a limited company and may not act as a company director without leave from the court.
It remains to be seen what the effect of these DROs will be. The government believe that DROs are an essential debt management tool in these tight financial times and offer hope to people on low incomes burdened by significant amounts of debt. However opponents of the system feel that this additional level of help for debtors will ultimately be at the expense of creditors. It is also likely that lenders will increase interest rates and charges for their good customers to offset the cost of those customers who obtain a DRO.
If you have any questions about this blog, please contact the Corporate Recovery and Insolvency Team.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.