Forever in their debt?
Personal insolvency advisers have new tools to play with
Debt relief orders (DROs) and enforcement restriction orders (EROs) are two
new tools in the personal insolvency adviser’s toolkit. But what are they?
DROs are aimed at the ‘indebted poor’, those with little or no assets and no
surplus income. They are to be introduced from April 2009 and at present it is
anticipated that there will be roughly 20,000 per annum. Those individuals who
can make use of DROs have domestic debts of no more than £15,000.
EROs are designed to provide a shield behind which the debtor can organise
their affairs after suffering a financially catastrophic incident that requires
protection from creditors. The stipulations for EROs are still being decided by
the government.
The new procedures sound too good to be true from the debtors point of view
compared to bankruptcy: they are cheap to use, simple to understand, and (in the
case of DROs) write off the debts without any apparent need to repay or suffer a
period of contrition.
DROs will be administered by official receivers, the civil servants who also
deal with bankruptcies and compulsory liquidations in their initial stages. This
raises two questions. Will the already busy receivers have the resources to cope
with the extra work? And, more fundamentally, is it right that civil servants
should be performing a quasi-judicial role, or should debt relief remain a
matter for the courts?
It appears that EROs will have to be monitored by the courts themselves and
this raises the question of whether they will have the resources to do the job
effectively. Will they be able to cope with the numbers and make sufficient
enquiries into the debtor’s affairs to make sure they are telling the truth?
It could be a recipe for disaster for those lending relatively small amounts,
with debts being incurred and just as quickly written off by the unscrupulous
debtor.
The system is untried and only time will tell. I recall being advised that th
ere would be no increase in bankruptcy numbers when the period of discharge was
reduced to 12 months. DROs and EROs should be there for the honest debtor. There
needs to be a proper regime in place that ensures that a sensible procedure is
available and works for the honest debtor, but weeds out those who are trying to
abuse the system.
Peter Sargent is a partner at Begbies Traynor and
vice-president of R3, the Association of Business Recovery Professionals