New debt relief orders may lead to increase in unrecoverable debts

Creditors may see a dramatic increase in the number of consumer debts which they will be unable to recover as a result of the introduction of Debt Relief Orders which comes into force on 6th April 2009, warns Paul Davies, head of credit management at Moore Blatch Solicitors.

The Tribunals, Courts and Enforcement Act 2007 introduces a new form of debt relief called a ‘Debt Relief Order’ (DRO).  DROs are aimed at people with relatively low liabilities, little surplus income and few assets and who are unable to pay off their debts in a reasonable time.

It is a basic requirement of the DRO process that debtors do not have sufficient assets or surplus income to make any realistic payment towards their debts. Debt relief orders are aimed at people who have less than £15,000 in debt, less than £300 in assets and less than £50 per month available income after they have met all their essential expenditure. Applicants will be allowed to have a vehicle with a value of less than £1,000.

Like bankruptcy, people will be discharged within a year and, with a few exceptions, any remaining debts will be written off. One major difference between bankruptcy and DROs is that there is no debtor’s estate when a DRO is made, hence the Official Receiver will have no legal claim over the debtor’s property and will not be seeking to realise assets and pay dividends to creditors. Creditors who are included in the DRO will be prevented from taking any action to recover their debts from the client.

It is intended that the debt relief order will be much cheaper than bankruptcy. People will have to apply for a debt relief order via an intermediary, which includes the CAB, National Debtline and Consumer Credit Counselling Service.  The fee for a DRO will be £90.00 - this covers the cost of the Official Receiver’s work in administering the application and making the order, and has been set to cover the cost of the actual work involved.

However, they are not an easy option to resolving indebtedness. Debtors subject to DROs will still be subject to the same restrictions as bankrupts and will not be able to apply for a further DRO for a period of 6 years.

There will also be a lasting impact on the debtor’s credit rating and the DRO will be displayed on the Individual Insolvency Register as currently happens in bankruptcies.
There are also restrictions on the ability to seek a DRO. The debtor’s conduct will be considered and may prohibit the ability to apply for a DRO. The debtor must not be in an insolvency procedure at the time of application. Certain debts are also excluded including any fine imposed for an offence, obligations arising under an order made in family proceedings, obligations arising and under a maintenance assessment under the Child Support Act and obligations arising from a liability under a Student loan.

As a creditor it is important to act quickly to recover your debts. The ability to collect debt and maintain efficient cash flow is vital for the success of any business.

Moore Blatch has a highly effective debt and asset recovery team who are recommended by the Legal 500. For further information on Debt Relief Orders or our debt recovery service, please contact Paul Davies on 023 8071 8090 or email paul.davies@mooreblatch.com