Insolvency Made Clear: A Guide for Debtors
Plain English, practical guidance for anyone facing demands over a debt they are struggling to pay. Plain English, practical guidance for anyone facing demands over a debt they are struggling to pay.
Alternatives To Bankruptcy Box 3: WHAT IF THE DEBTOR NEARLY QUALIFIES FOR A DRO? A debtor with £1,001 of assets cannot apply for a DRO. From the debtor’s perspective, this is highly regrettable. If they qualified for the DRO, they would keep up to £1,000. If they do not qualify then they may be made bankrupt and so lose their £1,001 in the various legal fees concerned. What can the debtor do? It is a criminal offence to make a false representation in the application (s251O of the Act). It is a criminal offence to make a gift or transfer of property within two years of making an application (s251Q). A person is not guilty if they had no intention to defraud or conceal the state of affairs (s251Q(3)). It is likely to be a criminal offence to give the £1 to a friend before applying for a DRO. It is not a criminal offence to spend the £1, provided it is not done to defraud the creditors. If the money was spent on something of lasting value, this would remain the property of the debtor and count towards their assets. However, if the purchase was on food or at the cinema, nothing of value would remain afterwards. The intention of the debtor is critical. It would be a criminal offence to deliberately go to a restaurant so that their creditors do not receive the money. It is not a criminal offence if an individual feels hungry and decides to spend a few extra pounds at a restaurant. The key difference is whether or not the debtor has the motive of defrauding their creditors. The criminal offences applicable to DROs are similar as for bankruptcy, and so see Chapter 7 for more detail. If a debtor has assets of over £1,000, and debts of over £20,000, it may be possible to repay the debts until the debts fall below the critical level of £20,000. This is a sensible strategy for the debt since it allows them to keep at least £1,000. Care should be taken when repaying debts to ensure it does not constitute a preference. In practice, this means the primary motivation should not be to allow a particular creditor to be in a better position (and certainly not a connected creditor, such as a family member). A debtor who repays their landlord because they are concerned about being evicted would not be giving a preference. If a debtor increases their assets or income to above the minimum set out above, the Official Receiver can revoke the DRO. This commonly happens because the debtor receives a windfall (say, they receive an inheritance which takes them over the £1,000 limit) or because the debtor starts a new job which increases their disposable monthly income. This creates a perverse incentive not to be 9
Insolvency Law Made Clear – A Guide For Debtors promoted (and perhaps, not be employed at all). However, the effect is only a year and a relatively small increase in assets is unlikely to trigger a review by the Official Receiver. If the income arises after the DRO year, then the debtor can keep it without needing to repay their earlier debts. If a debtor qualifies for a DRO, a DRO is likely to be an even better outcome than an IVA. This is because there is no need to repay the debts: the slate is wiped clean automatically. It is also because a DRO does not require creditor approval. No creditor will choose to approve a DRO: it guarantees zero return and bars them from recovering their debt. A DRO can be challenged, but in practice, unless the creditor believes that the debtor has substantially more than £1,000 of assets, it will not be value for money for them to do so. Note the use of a DRO when negotiating an IVA: if the debtor is in a poor financial position, they may be able to use the threat of a DRO to ensure that they keep at least a few hundred pounds of assets left to themselves. A debt relief order can lead to a debt relief restriction order or undertaking: these are equivalent to bankruptcy restriction orders, for which see Chapter 9. The six organisations that can submit DROs all have websites which are written for the ordinary user and can be consulted for more information about the process. Stop press There is currently a consultation to raise the thresholds to make it easier to obtain a DRO. This would increase the total amount of debt allowable to £30,000 (from £20,000); increase the value of assets owned by the individual to £2,000 (from £1,000); and increase the level of surplus income to £100 (from £50) per month. 1.3 County Court Administration Orders A County Court Administration Order (CCAO) is another insolvency procedure where the County Court takes control of the debtor’s finances. It is rarely used. There were fewer than 150 of these orders made in 2019. Under s112 of the County Courts Act 1984, where a debtor is unable to pay a County Court judgment of less than £5,000, the court may make an order providing for the administration of their estate. This typically is the payment of the debt by instalment, or the debt may be written off after a certain time. Since the debt must be less than £5,000, the creditor could not present a bankruptcy petition in any event. The debtor needs to complete form N92, which can be found at https://www.gov.uk/ government/publications/form-n92-application-for-an-administration-order. 10
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Alternatives To Bankruptcy<br />
Box 3:<br />
WHAT IF THE DEBTOR NEARLY QUALIFIES<br />
FOR A DRO?<br />
A debtor with £1,001 of assets cannot apply <strong>for</strong> a DRO. From the debtor’s<br />
perspective, this is highly regrettable. If they qualified <strong>for</strong> the DRO,<br />
they would keep up to £1,000. If they do not qualify then they may<br />
be made bankrupt and so lose their £1,001 in the various legal fees<br />
concerned. What can the debtor do?<br />
It is a criminal offence to make a false representation in the application<br />
(s251O of the Act). It is a criminal offence to make a gift or transfer<br />
of property within two years of making an application (s251Q). A<br />
person is not guilty if they had no intention to defraud or conceal the<br />
state of affairs (s251Q(3)). It is likely to be a criminal offence to give the<br />
£1 to a friend be<strong>for</strong>e applying <strong>for</strong> a DRO. It is not a criminal offence to<br />
spend the £1, provided it is not done to defraud the creditors. If the<br />
money was spent on something of lasting value, this would remain<br />
the property of the debtor and count towards their assets. However,<br />
if the purchase was on food or at the cinema, nothing of value would<br />
remain afterwards.<br />
The intention of the debtor is critical. It would be a criminal offence<br />
to deliberately go to a restaurant so that their creditors do not receive<br />
the money. It is not a criminal offence if an individual feels hungry and<br />
decides to spend a few extra pounds at a restaurant. The key difference<br />
is whether or not the debtor has the motive of defrauding their<br />
creditors. The criminal offences applicable to DROs are similar as <strong>for</strong><br />
bankruptcy, and so see Chapter 7 <strong>for</strong> more detail.<br />
If a debtor has assets of over £1,000, and debts of over £20,000, it may<br />
be possible to repay the debts until the debts fall below the critical<br />
level of £20,000. This is a sensible strategy <strong>for</strong> the debt since it allows<br />
them to keep at least £1,000. Care should be taken when repaying<br />
debts to ensure it does not constitute a preference. In practice, this<br />
means the primary motivation should not be to allow a particular<br />
creditor to be in a better position (and certainly not a connected creditor,<br />
such as a family member). A debtor who repays their landlord<br />
because they are concerned about being evicted would not be giving<br />
a preference.<br />
If a debtor increases their assets or income to above the minimum set out above,<br />
the Official Receiver can revoke the DRO. This commonly happens because the<br />
debtor receives a windfall (say, they receive an inheritance which takes them<br />
over the £1,000 limit) or because the debtor starts a new job which increases<br />
their disposable monthly income. This creates a perverse incentive not to be<br />
9
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