debt relief orders – introduction of the 'bankruptcy lite' procedure

With the number of UK 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 Act 2007 (inserting sections 251A-X into the Insolvency Act 1986), DROs have been introduced to deal with cases of individual insolvency 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 avoid the need for attendance at the bankruptcy court and the various other formalities involved in petitioning for bankruptcy. Present indications suggest that an upfront 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 creditor and business groups. Some creditors fear that debtors will routinely fail to disclose assets, not least as 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 monitoring the debtor's financial situation may be 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 (albeit reduced) stigma of a bankruptcy order.

It is likely that many of these creditor 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 the 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 Enforcement Act are administration orders (for individual debtors) and enforcement restriction orders. These procedures will be covered in subsequent editions of this bulletin.

For more information on this topic, please contact Dan Geddes or Gemma Smith of Blake Lapthorn's Insolvency and Business Recovery team.