Debt Relief Orders - the new bankruptcy?

The official statistics from the Insolvency Service reveal that there were 6,788 Debt Relief Orders (DROs) granted in the first quarter of 2011. That might not necessarily sound like a lot, if you know that there were 12,539 bankruptcies granted during the same period, but when you compare the DRO figure in 2011 with the second quarter results in 2009 – 1,978 – it becomes clear that this debt solution is increasing in popularity, and rapidly.

The Insolvency Service’s 2011 figures highlight a real need for DROs as a tool within the industry, so Debt Management Today took the opportunity to discover a little bit more about DROs, their restrictions, and debt experts’ perception of them.

What are the restrictions?

As a direct consequence of the Tribunals, Court and Enforcement Act 2007, DROs were introduced in April 2009, as an order consumers could apply for if they could not pay their debts. Once made, a DRO lasts for 12 months and has the same effect as a bankruptcy order – unsecured debts are written off after 12 months.

Vance Parsons, EuroDebt Director of DEMSA member EuroDebt Financial Services, explained some of the restrictions in place. “EuroDebt advisers are trained to assist clients with the provision of debt solutions to meet their specific circumstances and level of debt. Although a DRO is more cost-effective than bankruptcy, strict conditions regarding who can apply restricts the number of clients who are eligible.

“Some of these conditions include the unsecured debt being no more than £15,000, assets and savings no more than £300, and disposable income of less than £50 per month. DROs should be seen as a last resort and as such these conditions exclude a large percentage of those in debt,” he said.

JP Benitez, Director of Operations at InDEBT Expert, told us that a DRO costs £90 to enter into. “Many people who are struggling financially are immediately put off by the £90 admin fee, however the client can pay this off in instalments and there are also other options available such as social funding. Whilst this is, of course, not guaranteed it is definitely worth trying if the client really is in need of help,” he explained.

The Head of Corporate Relations at Think Money, Melanie Taylor, said of the process: “It is really the same as any other debt solution – we would do a full fact-find on the customer to discover their level of debt and their income versus expenditure. DROs can be quite restrictive because of the cap on the level of debt.”

She continued, “If the client’s circumstances are likely to improve within the next 12 months then this type of debt relief is not suitable. For example, if an unemployed client wants to be granted a DRO that’s fine, but if they get a job nine months into the 12-month period and can afford to pay back more than £50 per month then the DRO may be revoked and they will be left with their original debts. It is about making sure that if someone goes down this route, their circumstances are not likely to improve within a short period of time.”

David Rankin, Insolvency Practitioner at Harrington Brooks, agreed. “If circumstances improve very near the end of the DRO the official receiver may extend the DRO by three months for the debtor to come to an arrangement with their creditors,” he warned.

“Because of the slightly convoluted entry process they are possibly still not as common as they could be. Application must first be made to an ‘approved intermediary’. The £90 fee is then payable to the Official Receiver – a civil servant and part of the Department for Business, Innovation and Skills,” he added.

The process

Aftab Zahoor, Director of Debt-Simple Limited, explained how debt management companies can help: “Companies can help provide as much information as possible for individuals that fit these criteria and direct them to the relevant approved intermediary to help complete the application.”

“Realistically,” David Rankin continued, “DROs are not really appropriate for homeowners. For tenants with liabilities less than £15,000 they are a much cheaper alternative to bankruptcy but they must be able to prove monthly disposable income of less than £50 so they really are for the poorest members of society, although in these times of economic hardship they are becoming increasingly popular.”

Vance Parsons explained: “Debt advisers from debt management companies such as EuroDebt should be highly trained on all debt solutions and are therefore in a position to effectively advise clients on the best course of action for their individual circumstances.”

Think Money have a specialist DRO team and approved intermediaries. Melanie Taylor said: “We were approved around a year ago and have had in the region of 1300 enquiries. I believe if the criterion were less restrictive more people would use this as an option.

“In reality, DROs are still very much an insolvency tool – and have similar restrictions to those in place during bankruptcy. A DRO is still recorded on the client’s credit file for six years. Perhaps it is time for the restrictions to be changed, because the industry average debt is now closer to £18,000 – higher than the DRO cap of £15,000.”

Industry perception

Aftab Zahoor said, “I think it’s a good solution for individuals that would otherwise have fallen into a grey area. They normally won’t qualify for a debt management plan, IVA or bankruptcy.”

JP Benitez added, “With the current climate of our economy today and the rise in living costs, many families and individuals are starting to feel the pressure financially. The number of people expected to look for debt advice in the next two years is estimated to climb dramatically and due to this we feel DROs are a necessity for those who are indeed struggling beyond their means.

“Since the introduction of DROs (focusing on the past year specifically) bankruptcies and IVAs have taken a steady dip whilst DROs are slowly increasing. There are good and bad points to this, but we can safely say it eases the pressure on courts suffering from volume in administration – when dealing with bankruptcy – as well as accommodating those who really need it and simply can’t afford other insolvencies.”

David Rankin agreed. “For a certain section of society they are an ideal tool. Debt management plans are generally not available for anything less than a monthly contribution of £80 and IVAs need an absolute minimum of £100 per month.

“Prior to the introduction of DROs therefore, consumers who could not afford either of those options were faced with having to find in the region of £600 to go bankrupt, which was generally impossible. They would then be faced with interminable telephone calls and letters from creditors, bailiffs etc until one of their creditors may have made them bankrupt. So in that sense DROs are a much needed remedy.”

After reviewing the statistics and speaking to industry experts, it appears that DROs are a useful tool for the right client. The number of restrictions surrounding the orders makes them unsuitable for a lot of consumers, but for those without many assets, disposable income or for whom bankruptcy is simply not an option, it seems they really can provide a relief.

By Miranda Atty

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