The Insolvency Service review discussed in a previous blog also raised the possibility of reforms to the Debt Relief Order procedure.
Debt Relief Orders are a transplant from New Zealand, which first promoted the so-called ‘no asset procedure’ in 2002. The English Department of Constitutional Affairs floated the idea of the DRO in 2004. Its objective was to provide a low cost alternative for individuals who could not pay their debts but who also could not afford bankruptcy (see here). It was viewed as an alternative for individuals currently using the administration order procedure. Evidence indicated that many of this group, primarily women, were unemployed or living on a low-income. They could not afford the bankruptcy fee and perhaps feared its stigma. The DRO would, according to the Department, provide a less stigmatizing alternative.
The DRO is a highly targeted debt relief option, permitting a discharge of most unsecured debts after 12 months. It is limited to individuals with £15000 in unsecured liabilities, less than £300 in assets and no more than £50 in surplus income. It has certain attractive characteristics. It is an administrative process initiated online, uses ‘trusted intermediaries’ (e.g. CABx) to screen debtors and attempts to reduce stigma by not using the term bankrupt (although the media sometimes call it bankruptcy lite). It also builds in safeguards. It can only be exercised once every six years and there is the possibility of sanctioning debtors under a Debt Restriction Order. Because England insists on a ‘user pay’ model of bankruptcy, applicants must pay £90 to access the procedure.
Preliminary evaluation by the Insolvency Service in 2010 of the demographics of users indicates that the majority of users are unemployed (48% in 2013-14) at the time of entry. Women are disproportionately represented (63 % compared with 51% in the population). More under 25s (12 percent compared with 5 percent in population) use the procedure and also slightly more in the over 55 population. Almost 50 percent of users are single, a larger percentage than in the bankrupt population.
The central question is whether the procedure achieves its primary goals of financial rehabilitation and avoiding financial exclusion. Unfortunately the Insolvency Service cannot answer this question because of the absence of data. Although it was tasked with monitoring the success of the DRO, cuts to the resources of the Service mean that it cannot undertake this type of research. Evidence based policy is therefore not possible and the Agency is reduced in its consultation to asking ‘stakeholders’ about their views on this question. This approach hardly substitutes for systematic research on key issues such as the ability of individuals to get credit again, manage precarious finances, not suffer discrimination from landlords, or face difficulties with work. We might hypothesise that the DRO would reduce stress and the mental and physical health effects of debt, and possibly costs to the Health Service. Individuals may however be deterred from taking work during the 12 month period since this might result in a revocation of the order. If this is the case (the Insolvency service provides no hard evidence on this point) then a 6 month period might be more appropriate as adopted in the recent Scottish Bankruptcy Act amendments (see here).
New Zealand assessed its procedure in 2011 (see here). The users of the procedure have a similar profile to English debtors, with an overrepresentation of women, high levels of unemployment and reliance on social security. The review found some real benefits from the procedure: individuals found it easier to manage their household finances, and it had a positive impact on health and family relationships. However debtors on social security continued to have problems and there were some negative aspects such as the inability to obtain new credit, some debtors losing their jobs because of the order, and some landlords refusing to accept them as tenants.
A primary drawback of the process is its limited availability. A swift administrative process should be more widely available. Most bankrupts do not have significant assets or substantial surplus income. About two-thirds of bankrupts in England in 2013-14 had less than £2000 in assets and less than £30000 in debts. They are generally unfortunate in having suffered a change of circumstances or miscalculated finances in an economy where high levels of debt are the norm. Few are trying to act opportunistically. The court process is itself increasingly administrative in character and will be replaced by administrative adjudicators once current reforms are implemented in 2016. There is modest investigation by the Insolvency Service of the majority of bankrupts. And an individual is discharged after 12 months. The main difference is the cost of bankruptcy with individuals having to pay over £700 in costs to access bankruptcy.
Other countries such as Canada have swift administrative processes for individual insolvencies. The great majority of Canadian bankruptcies are processed through a summary procedure (where the realizable assets of an individual are not likely to exceed $CAN 15000) with an individual being discharged after nine months.
Finally, the DRO may not solve the problems of those living in precarious employment or on the margins of society and more research is needed on the longitudinal effects of bankruptcy and DROs in providing a ‘fresh start’. It is a pity that the Insolvency Service was unable to undertake such a study.