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Arrangements short of bankruptcy

With the recent and increasing levels of bankruptcy petitions recently reported which is likely to get worse in the present economic climate, it seems timely to revisit the alternatives on offer to bankruptcy to consumers.

Informal Arrangements

The first alternative is of course the informal arrangement or a composition with Creditor. These days that is very much from the consumer/Debtor’s point of view territory run by the Money Advice Centres, the CAB, the Consumer Credit Counselling Service and commercial Debt Counsellors. The source of advice contacts all the consumers Creditors and tells them of the Debtor’s financial difficulties and makes proposals for payment by instalments. If acceptable, then the counselling service collects the payments and distributes the monies received in accordance with the scheme recovering its fees from the consumer as payments are made.

The advantages of these schemes are that they do not incur legal costs, and are not necessarily binding on the individual Creditors so can be renegotiated if circumstances change.

The downside of any informal arrangement, is that not every Creditor will wish to co-operate, and may start their own enforcement proceedings, perhaps even bankruptcy which will sink the whole scheme. Reaching an informal arrangement of this sort will not be a bar to anyone taking proceedings.

The value of the arrangement will very much depend upon the accuracy of the Debtor’s own information about his financial circumstances and its interpretation by the debt Counsellors for example their view of the Debtors needs that must be taken into account before instalments are considered from any surplus income.

Administration Orders

The second alternative are Administration Orders. You may recall that the County Court has power to make an Administration Order and the details are set out in the old County Court Rule at Order 39, which is in Schedule 2 to the Civil Procedure Rules. This provides the mechanism by which the County Court can collect instalments from the Debtor and distribute the monies collected to the Creditors involved in the order over a period of time. The scheme is limited to a total indebtedness of £5,000.00. There is no prioritisation of debts and all Creditors are paid pro-rata from the monthly payment received from the Debtor by the Court.

The procedure requires the Debtor to complete a statement setting out a list of debts due to Creditors which must be verified on oath and filed at Court. A Court Officer – not the District Judge – if he is satisfied the Debtor has the means to discharge the debts in full over a reasonable period, will decide the amount and frequency of payments to be made and then send the Debtor and the Creditors listed, a copy of the list and the proposed payment. Creditors have 14 days to object and if a Creditor does, the District Judge at a hearing will decide whether or not the Order will be made otherwise the Order will be made.

The advantages are of course that the scheme is run by Her Majesty’s Court Service and therefore paid for by the Court Service. It is a useful mechanism for the recovery of low value consumer debt and application can be made by the Creditors to vary the terms of the Order if the Debtor’s means improve. If the Debtor stops making monthly contributions to the Court (which could be directed to be made by attaching the Debtor’s earnings), then the Order can be revoked. This will leave the Creditors to pursue their own remedies direct.

The disadvantages are that the procedure can be very long and drawn out with low payments. The Order acts as a stay on any further proceedings by Creditors, although there is an exception where bankruptcy petitions for a debt in excess of £1,500.00 are issued within 28 days of the debtor notifying the Court of the debt although the permission or leave of the Court will be required before the petition can be pursued.

The Administration Order provides a mechanism for the recovery of small consumer debts and provides the individual consumer with some protection from Creditors so long as he or she complies with the terms of the Order and the payments required. The Administration Order is notified to Credit Registry Trust and should be therefore information available to you from your credit search. Bear in mind that a Court can investigate an Administrative Order of its own violation when the Judge deems it appropriate at an oral questioning appointment.

Debt Relief Order

The third and new alternative is the Debt Relief Order, which is applicable to situations where the sum involved is £15,000.00 or less. It is intended to provide an alternative to the well known Individual Scheme of Arrangement or IVA (for which see below) which is not attractive to potential IVA supervisors or debtors because the fees charged under IVA’s are not justified with a low sum of indebtedness.

The DRO was introduced by the Tribunal Contributions and Enforcement Act 2007 on 9th April 2009.

To qualify the Debtor must be unable to pay his debts and have a disposable income of not less than £50.00 per month and gross savings of less than £300.00.

In accordance with these modern times, a DRO can be applied for by a consumer via an authorised intermediary on line to the Official Receiver’s office. The Court need not be involved.

While the DRO is in force it is enforced, the consumer will be protected from enforcement action by the Creditors listed in the application, and be free from those debts at the end of the period, normally twelve months from the Order. The debtor is obliged to provide information to and cooperate with the Official Receiver and is expected to make arrangements to repay their Creditors faster should their financial circumstances improve.

The existence of a DRO will be known, and will therefore affect the consumer’s credit rating and there will be civil and criminal penalties for those who abuse the system. Similar restrictions are placed upon a person who is the subject of a DRO as those who are the subject of bankruptcy.

If a Creditor has information that indicates that the debtor does not meet any of the criteria, then they should inform the Official Receiver who will consider every valid objection and is able to revoke a DRO if appropriate.

“The official position is that DRO’s are aimed at people who have no assets and a low income, who have no other access to debt relief and no prospect of the situation improving. If people do have assets or there is a possibility of an improvement in financial circumstances then a DRO is not an appropriate solution and other debt remedies are available.”

This is all very new and it is difficult to see how it will work out but you will note that the introduction of a consumer to a DRO can be made by an intermediate authority or competent authority, if authorised by the Secretary of State under the appropriate act. Whether or not DRO’s are abused in the future will I suspect depend upon how enthusiastically they are monitored by Creditors and how much the Official Receiver’s office is pushed into reviewing the Orders if a valid objection can be found. Clearly the Government feel that those who qualify for a DRO are unlikely to be suitable for an Individual Voluntary Scheme of Arrangement because of their financial positions.

Individual Voluntary Schemes of Arrangement

These are well established and are a creature of the Insolvency Act 1986. They were intended to offer debtors a way out of insolvency without succumbing to bankruptcy.

Creditors will have come across the mechanisms involved frequently. The debtor engages the services of a nominee of the proposed scheme who must be an authorised insolvency practitioner. The nominee sends out a detailed proposal to all the Creditors explaining why an IVA is desirable and why Creditors should agree to it, frequently contrasting the situation and benefits of recovery under an IVA as opposed to those in bankruptcy which are normally intended to demonstrate that recovery is nil.

The scheme once circulated must be approved by a meeting of the Creditors who receive it, and once agreed to by the appropriate majority in meeting is binding on all of them. Even Creditors who do not receive the IVA Scheme prior to the vote may be bound by it although they can challenge the decision of the Creditors Meeting if they would have been entitled to vote at it. The objection must be raised within 28 days of the date that they became aware of the IVA.

The supervisor of the scheme if it is approved at the Creditors Meeting is responsible for collecting in the monies as promised by the debtor, accounting for them, and distributing sums to the Creditors.

The advantage is that there should be a thorough investigation of the Debtor particularly since the Insolvency Act 2000 which will provide greater assurance to Creditors as to the true benefits of the Scheme. Invariably, the return on a successful IVA is going to be significantly better than that on bankruptcy, but the difficulty is that all IVA’s are subject to the fact that the nominee and the supervisor will both charge for their efforts and the more complex the arrangement the greater their fees will be.

In some IVA schemes I have seen, the first year’s or more of instalments paid by the Debtor’s have simply gone to discharge the nominee/supervisor’s fees before any benefit is seen by the Creditors.

However, the Creditors do have the benefit of knowing that the IVA is under the overall supervision of the Court, and the nominee/supervisor are themselves under the scrutiny of their professional bodies. Given that professional fees are charged, it can readily been seen how IVA schemes are going to be financially unworkable below schemes involving total debts of £25,000.00-£30,000.00.

If any one of these routes fails, then ultimately the Creditor can pursue conventional methods of recovery whether by Court action and/or bankruptcy proceedings thereafter. It will be interesting to see in say five years time how much of a marketplace has grown around the provision of DRO’s. There is now a considerable industry involved in providing IVA services and experience shows that there are some nominee/supervisors who are much more capable of delivering realistic proposals than others. As always it pays to study proposals carefully and assess results.

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