Debt Relief Order – Introduction of the “Bankruptcy Lite” Procedure

With the number of personal insolvencies expected to increase dramatically over the next 12 months, the anticipated introduction of the Debt Relief Order (DRO) in April 2009 will provide a new and potentially more appealing alternative to bankruptcy for insolvent individuals.

Introduced by the Tribunals, Courts and Enforcement Acts 2007 (inserting sections 251A into the Insolvency Act 1986), DROs have been introduced to deal with the cases of individual insolvencies where only relatively small sums are owed, but the debtor has limited income and assets such that bankruptcy would be unaffordable (if sought by the debtor).

Those who can show an inability to repay their debts as they fall due, have debts of £15,000 or less, assets of less than £300 and surplus income of less than £50 per month will be eligible to apply for a DRO.  It will also be necessary to demonstrate that bankruptcy would be disproportionate.  Once the debtor has established these conditions the Official Receiver will make the DRO and inform creditors.

After 12 months have elapsed the debts are discharged, subject to the debtor advising the Official Receiver if their financial circumstances improve during that period.  Usually for the same period, a moratorium would be imposed to prevent creditors from taking enforcement action; a helpful source of protection for the debtor.

One major advantage of the DRO procedure for debtors is that it will enable them to declare themselves insolvent over the internet, and thereby avoiding the need for attendance at the bankruptcy court and the various other formalities involved in petitioning for bankruptcy.  Present indicators suggest that an up-front DRO fee of £100 will be charged in all cases; yet this is substantially less than the current bankruptcy petition costs.  It will only be possible to obtain a DRO by applying to the Official Receiver through an approved intermediary. 

The introduction of bankruptcy lite has generated some concern amongst creditors and business groups.  Some creditors fear that debtors will routinely fail to disclose assets, not least that the system relies in large part upon the accuracy of information provided by the debtor via the website.  In the same way, the Official Receiver’s task of managing the debtor’s financial situation may have been made substantially more difficult.  Finally, there is a more general concern that DROs will be used to allow individuals the opportunity to escape their debts without the stigma of a bankruptcy order.

It is likely that many of these creditors’ concerns will be addressed before the anticipated introduction of DROs in April 2009, and that an effective audit system is designed.  DROs may then provide that much needed alternative to personal bankruptcy or individual voluntary arrangements for those on low incomes and struggling with debt.

Also coming into force under the Tribunal, Courts and Enforcements Act are administration orders (for individual debtors) and enforcement restriction orders.

April 2009