June 2009
From April 2009 the government are introducing two new measures to help those in debt. Under the Tribunals Courts and Enforcement Act 2007 there will be two new options, debt relief orders and enforcement restriction orders, to assist those in financial difficulty.
Enforcement Restriction Orders (ERO’s)
These are designed to provide short term relief for individuals who experience a sudden change in financial circumstances i.e. redundancy, – To be eligible the debtor must:-
- Have at least 2 qualifying debts
- Be able to satisfy the court that his/her financial circumstances are likely to improve usually within 6 months,
- They must be able to make some sort of payment to their creditors as part of the order
These orders will normally last for a maximum of 12 months and prevent creditors from taking or continuing enforcement action for the duration of the order.
An ERO is a useful tool for those who experience a dramatic fall in income but manage to get back on their feet quickly. It may well be that this ends up as a step short of the debtor entering into an IVA. If the debtor’s financial position does not improve the debtor is likely to end up either doing an IVA, Debt Management Plan or considering Bankruptcy.
Debt Relief Orders (DRO’s)
Following a detailed review of insolvency procedures available to those in financial difficulties, it became apparent that there was a group of people for whom bankruptcy was too drastic and inappropriate. The new procedure was therefore developed which has the effect of keeping the smaller cases out of bankruptcy but at the same time providing the debtors with relief from creditors. Eligibility:-
- Debts of less than £15K
- Assets less than £300
- Surplus income less than £50 per month
The idea is that for a one off fee of £90, debtors will be able to access the Debt Relief Orders on line, through an approved intermediary. It is anticipated that these approved intermediaries will be CCCS, Money Trust and other none profit making bodies.
The process is done under the auspices of the Official Receiver and the Courts. It has the effect of preventing creditors from pursuing claims and once 12 months have elapsed the debts are discharged. If a debtor has a change in their financial circumstances (for the better) they will have to advise the Official Receiver.
The DRO is a good idea for a large number of people for whom bankruptcy is the only other suitable remedy but extremely expensive. It would also have the effect of reducing the number of petitions the courts have to deal with and reduce the Official Receivers bankruptcy workload. It is estimated that 11% of current bankruptcies would qualify for DRO.
These new procedures are to be welcomed. However we recognise that it took 15 years for the number of IVA’s to start rising from approximately 7,000 per year. The main reason for the vast increase in the number of IVA’s was that private organisations became involved and saw the opportunity of expanding the market through advertising. The marketing spend to dramatically increase the number of IVA’s per year was several hundred pounds per case. It is not therefore clear how these new processes are going to attract significant interest unless there is some form of advertising programme. We have a similar situation already with Fast Track Voluntary Arrangements. A procedure that has been on the statute books for a number of years but is rarely used. The private sector are not involved in them and therefore there is no advertising. Maybe the new procedures will take off.
