Monday, 6 April 2009

They are here!! DROs - will personal insolvency figures really skyrocket?

It is the 6th April - Debt Relief Orders (DROs) are now in force!!! The introduction of this new personal insolvency procedure has come with a number of notable press releases which hint at the qualities of the procedure but also the expected use. In this regard the Association of Business Recovery Professionals (R3) comments are particularly noteworthy, especially as they have suggested that,  "Personal insolvency numbers [are] to skyrocket with new statutory debt solution." Will this actually be the case? Only time will tell, but it is interesting to mull on both the reasoning behind such a statement from R3 (procedure administration protectionism?) and also whether or not their prediction will come to pass. The R3 press notice goes on to note that:

"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."

All legislation comes with an impact assessment statement so one could take issue with a number of points in the above paragraph. For example, the number of people below a certain income could be ascertained fairly easily in the same way that any level of income group could be ascertained through taxation and employment records. R3  did respond to the original DRO consultation, so it is presumed that they expressed a similar sentiment then. The president of R3, Mr Nick O'Reilly, goes on to observe in the press notice:

“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...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.”

Interestingly R3 take a comparative approach to their thesis when they note that, "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."

Mr O'Reilly concludes by observing that:

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.”

Another interesting insight comes from KPMG'Mr Mark Sands, Director of Personal Insolvency at KPMG. He said:

“We expect this new approach to increase the number of people using personal insolvency as the way to deal with their debts. In KPMG’s view, DROs, together with the expected increase in unemployment, are likely to lead to record levels of personal insolvency of more than 150,000 in 2009. Falling house prices, the general downturn and the associated increases in unemployment are starting to have an impact.  Whilst consumers will fight to keep their jobs and their family homes, for those who lose both there is often little reason for someone with debts not to declare themselves bankrupt. From Monday, many will have the alternative of entering into a DRO.  We expect bankruptcies and DROs to form an increasing proportion of personal insolvencies as Individual Voluntary Arrangements, where the consumer usually commits to a five year payment plan, become increasingly unattractive to those who have lost their job or their home.”

DROs vs bankruptcy

Comparing DROs to bankruptcy Mr Sands observed: “Many people in debt suffer stress and anxiety; resolving their debt problems without the need to go to Court and at a lower cost will be a great relief, and will make personal insolvency accessible to many people who were previously unable to access bankruptcy due to the cost and were put off by the complexity and stigma of the process.  As a result, we expect to see many more DROs in their first year than we will in a typical year in the future.”

Concerns have been raised that DROs will be abused.  Mark Sands reassured stakeholders “The new approach involves checks and balances; if a debtor lies about their circumstances then the DRO may be revoked, and the debts pursued once more, if at any time it becomes clear that they did not meet all the criteria for entering into a DRO.  For the honest debtor, the restrictions of a DRO while they wait one year before the debts are written off are a proportionate response to their need for debt forgiveness.”

So both these learned commentators are predicting an increase in the redress to personal insolvency laws generally, and particularly through the DRO procedure. We will have to watch developments carefully to see if this will be the case. I am sure the Insolvency Service Statistics arm of the Policy Unit will be monitoring developments. 

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