Press Release

Personal insolvency numbers to skyrocket with new statutory debt solution

6 April 2009

The new low-cost, out of court insolvency vehicle the Debt Relief Order (DRO) has so far generally been welcomed with open arms, but R3, the insolvency trade body questions whether the true impact has been underestimated. The introduction of the procedure today will open the gates to an unknown number of individuals with low incomes, and very limited assets who have found themselves unable to pay back their debt.

"The Citizens Advice Bureau, just one of the six intermediaries, has estimated that annually around 50,000 individuals on its database could be eligible for a DRO. This vast number, combined with the backlog of people for whom there has been no alternative up until now, is going to put a massive administrative burden on intermediaries and regulators," stated R3 president Nick O'Reilly.

"We also believe that it's imperative that applicants have considered all their options, and understand the implications of a DRO. For all intents and purposes a DRO will have the same effects as Bankruptcy, but it does not have the same application cost which has proven prohibitive to those with very low income, and few assets."

Individuals who meet the strict criteria for a DRO will deal directly with an approved intermediary organisation that will help them complete the application online. The responsibility of approval and regulation will lie with the governments' Insolvency Service, as opposed to bankruptcies where the order is made by the courts.

The introduction of a similar scheme in Scotland (the Low Income Low Assets (LILA) route into bankruptcy) last year could be considered as an interesting case study for what could happen in England and Wales. It had been anticipated that about 3,000 people would apply for LILAs when they were introduced. However, statistics show that in the first three quarters of 2008 over 7,000 individuals applied for the procedure. Figures for the full year are likely to show that demand for LILAs was more than three times greater than had been anticipated.

"We believe that the introduction of the DRO is a positive step from the government towards combating poverty by releasing those who are trapped in impossible debt. This is particularly important as the recession deepens, redundancies increase, and employment is increasingly difficult to find.

"However, as with any insolvency procedure the DRO must be supported by stringent fact-checking and over-sight in order to stop abuse. R3 is concerned that if the number of DROs outstrips estimates as it did in Scotland, the government might have not have allocated enough resources for the regulator to do this.

"As with any debt solution, it is crucial that those who enter the order understand all their options, and know exactly that they are getting into. A DRO is not an easy way out, but a necessary measure for those in impossible financial situations to start again. Financial education must also be provided to rehabilitate these individuals so that they hopefully avoid getting into this position again," concludes Nick O'Reilly.