Bankruptcy: helping the helpless?

For a long time now, it has been a common perception that bankruptcy proceedings are a better option for individuals who find themselves in a position where they cannot repay their debts.

But what is not commonly known or understood is that to avail of this protective measure, the same individual has to stump up £495 to pay for a court fee and deposit payable to the Official Receiver.

For the socially excluded, such as single parent families or persons whose only income is derived from state benefits or pensions, this can deny them from this option, leaving them to the mercy of unscrupulous loan sharks or never-ending repayment plans.

To address this anomaly, the Department of Constitutional Affairs has introduced the tribunals, court and enforcements bill, which intends to introduce a new style method of debt relief for people in England and Wales who owe a relatively modest amount, have no assets to repay what they owe and cannot afford to declare themselves bankrupt.

This procedure is to be known as a debt relief order and legislation is currently in the process of being introduced, but no firm date has been set for its introduction.

Those who have debts of £15,000 or less, assets of less than £300 and surplus income of less than £50 per month can apply for a DRO that will lead to the debts being discharged after just one year.

During this period, the people party to the order will be protected from enforcement action from their creditors and subject to similar restrictions to those currently instigated under more formal bankruptcy proceedings. To apply for a DRO, the debtor will apply to the receiver via an approved intermediary ­ currently anticipated to be the Citizens Advice Bureau, debt management companies and insolvency practitioners ­ to see how this may operate in practice.

DROs will be more suited to those with consumer debt rather than businesses, but soletraders will not be excluded.

There is no firm timeline for the introduction of DROs, which many consumer groups believe ought to be implemented at the earliest time parliament can push for full legislative passage. In contrast, there are alternative views that this is yet another step to making bankruptcy or debt avoidance easier.

Clearly, used for the right reasons they will bring much needed relief to those who need it the most, but as it is not yet clear how the calculation of assets and disposable income is to be assessed there is clearly much work yet to be done at the coalface.

Melanie Giles is an insolvency practitioner at Jones Giles