Debt Relief Orders – A Gift to Debtors and a Risk to Businesses

Debt Relief Orders – A Gift to Debtors and a Risk to Businesses

Debt Relief Orders are a cheap alternative to bankruptcy which allows debtors to write off up to £15,000 of debt without going into bankruptcy or an IVA, without making any contributions towards paying the debts.

To apply for a DRO, you must meet certain conditions:

  • You must be unable to pay your debts.
  • You must owe less than £15,000.
  • You can own a car to the value of £1000 but the total value of other assets must not exceed £300.
  • After taking away tax, national insurance contributions and normal household expenses, your disposable income must be no more than £50 a month.
  • You must be domiciled (living) inEnglandorWales, or at some time in the last 3 years have been living or carrying on business inEnglandorWales.
  • You must not have been subject to another DRO within the last 6 years.
  • You must not be involved in another formal insolvency procedure at the time you apply.

From the point of view of the creditor, the DRO enables debtors to run up debts and then have them written off with no real comeback, as long as they do not retain any assets. There are provisions which purport to address those who have run up debts in a “frivolous” manner, but in practice we have no idea what is actually done to address this. Nor do we know what is being done to check that debtors have assets of less than £300. My personal opinion is that as owning an iPhone and iPod would exceed this, debtors will just state no assets when this is not actually the case.

TheInstituteofCredit Management’s magazine in February 2012 quotes that the age group 25-34 are the most frequent users of DRO’s with one in three owing less than £5,000. These used to be debts on credit cards etc which we had to pay interest on and deal with over time, now they can be written off and there is nothing that the creditor can do about it.

This leaves the key question for businesses dealing with consumers, particularly younger consumers in this high-risk group: what can we do to avoid losses under DRO’s? The only foolproof answer is not to give credit. In practice this will often lose too much business and so SGP recommend a risk-based approach of:

  • Reducing credit limits for higher-risk groups
  • Using guarantors where higher levels of credit have to be given
  • Ensuring your terms and conditions offer you adequate protection such as enabling you to cancel contracts for service if a debtor applies for a DRO (existing terms covering IVA’s and bankruptcies will need amending) and to enable you to recover goods not fully paid for (retention of title).
  • Using an experienced debt recovery agency at an early stage to recover unpaid accounts.

As usual, Insolvency law as it applies to individuals offers protections only for debtors – businesses offering credit are left at increased risk. Put your defences in place now!

 

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