When to apply for a debt relief order

Every solicitor should be aware of the debt relief order (DRO), and if necessary should pass the essential information to the relevant client. Financial advisers, debt counsellors and advisers, to be found in CABx and similar institutions, also need to be aware.

The DRO is intended for those who are or have become 'too poor to go bankrupt' and cannot even afford the fees to go bankrupt in the normal way. They have no income and no assets to speak of. The DRO is a sort of poor man's bankruptcy.
A DRO is available if, after allowing for essentials such as clothing, furniture, household equipment, tools of trade and a modest domestic motor vehicle, the debtor has less than £50 a month surplus income exceeding the amount necessary for the reasonable domestic needs of himself and his family, £300 property (excluding pension rights) and the qualifying debts amount to no more than £15,000.

A DRO is not available to a debtor if he is an undisclosed bankrupt, subject to an interim order or voluntary arrangement, or subject to a bankruptcy restrictions order or a debt relief restriction order, or a debtor's or creditor's petition for bankruptcy has been presented.

Application for a DRO is made to the official receiver (OR) by an approved intermediary (AI), approved by a competent authority designated by the secretary of state such as a specialist debt counsellor or adviser. The OR must be satisfied that the debtor has correctly listed the 'qualifying debts' (liquidated sums). The debtor must provide assistance to the OR, and inform him of any change in circumstances.

Secured debts, such as a mortgage, are excluded. The mortgagor will no doubt either sell up or seek to persuade the mortgagee to suspend repayments, or take interest only, or capitalise the payments as they fall due by extending the length or the amount of the mortgage. In order to avoid homelessness the OR may consider a reasonable regular mortgage payment to be necessary. Student loan deductions are also excluded, and continue to be made. The DRO must comply with the statutory conditions in schedule 4ZA.

The creditors may object to the making of a DRO, but in practice there may be little point in doing so, unless there is evidence of fraud or serious impropriety. The DRO lists the qualifying debts. The DRO is registered centrally.

The right of the creditors to seek a remedy for the debts is then subject to a 12-month moratorium, subject to extension by the OR. During the 12 months the debtor is as if adjudged bankrupt. The creditors have no remedy. Then 12 months from the making of the DRO the debtor obtains an automatic discharge and release. The 'slate is wiped clean'; though not in respect of fraud.

The OR may always amend or revoke the DRO. DRO proceedings will not normally come to court, but the OR may always seek directions if he feels the need; for example, in the case of lack of cooperation, or fraud.

Naturally false representations and omissions, concealment or falsification of documents, fraudulent disposal of property, fraudulent dealing with property obtained on credit, and obtaining credit or engaging in business are offences.

The DRO may be seen as a golden opportunity to irresponsibly run up debts, go bust, and escape all liability

In bankruptcy proceedings in an appropriate case the judge may refer the matter to an approved intermediary AI with a view to transfer to the DRO procedure.

Social security deductions

Millions of pounds are paid out by the social security authorities as a result of misrepresentation or non-disclosure (overpayments). The practice is for those overpayments (but not overpayments made by mistake) to be recovered by way of deductions from future payments, a sort of debt recovery process. Loans are recovered in the same way. Suppose the recipient of a loan and deduction arrangement becomes subject to a DRO, can the deductions continue to be made? The Supreme Court in Secretary of State for Work and Pensions v Payne [2011] UKSC 60 has decided no, the debt is irrecoverable both during and after the end of the DRO. Parliament probably did not intend this result, if indeed the matter was ever considered, and a legislative 'rectification' may be expected.

Tenant deductions

The tenant of rent-controlled premises overpaid the rent to the landlord, and accordingly acquired the statutory right of deduction from future rent payments. The landlord's trustee in bankruptcy sued for the full rent but failed. The statutory debt and the statutory right of the tenant to recoup remained, and it was not discharged in the bankruptcy (Bradley-Hole v Cusen [1953] 1 QB 300 CA). This decision is not affected by Payne, thought the lords recognised a certain lack of logic and consistency in the law.

Debt relief restriction order

In order to protect creditors against any culpable or flagrant conduct or behaviour after 6 April 2009 on the part of the debtor to the detriment of creditors, a debt relief restriction order (DRRO) may be made, lasting for a period of between two and 15 years, thus preventing an unscrupulous debtor obtaining a DRO and consequent discharge and release of debts.